Climate change and fiscal policy for a small open commodity-exporting economy

We study the implications of climate change and associated mitigation measures for fiscal policy using a small open economy general equilibrium model for a commodity exporter. Climate-related issues have important implications for fiscal policy given the tax implications on fossil fuel industries and the green transition. For commodity-exporting economies, these issues are even more pertinent, since they generally produce commodity goods that are environmentally harmful through extraction or production processes that generate heavy emissions, while simultaneously relying on commodity production as their main source of livelihood. Preliminary results include, firstly, that a subsidy on green energy increases output and improves the country's international competitiveness and trade balance. Secondly, a fossil fuel tax can cause economic downturns in commodity-exporting economies, exacerbated by negative trade balances stemming from a lack of international competitiveness. Policy-makers should therefore select tax levels cautiously to offset potential adverse effects on gross domestic product growth.