Strategic effects of stock pollution: the positive theory of fiscal deficits revisited

Abstract

This article introduces a dynamic political-economy model of public debt which integrates climate policy. Strategic incentives are shaped by both an emission interaction and a budget interaction if public good provision contributes to a stock of persistent pollution. In a bipartisan system, politicians, who disagree on the optimal internalization of pollution, compete for office. The central finding is that bequeathing a large stock of pollution to the future government is not optimal for any incumbent regardless of their environmental preferences. This leads to strategic emission abatement in the first period. Additionally, while the incumbent engages in strategic deficit spending when reelection is uncertain, this effect is no longer necessarily inefficient when accounting for stock pollution. Both effects may increase welfare as a direct result of reelection uncertainty.