Public Economics

Public Economics and Climate Finance
Public Economics

The research within this Future Lab will be undertaken against the background of the question how we can reconcile short-term human well-being with long-term environmental sustainability. It aims to provide scientific advances and policy-relevant insights regarding the economics of the global commons – which include natural commons, such as the atmosphere, land, and forests, as well as social commons, such as health care and education systems, basic infrastructures and a stable financial system. The Future Lab seeks to identify effective policies that help to manage the global commons and discuss their contribution and relation to key societal challenges, including rising income and wealth inequalities and social divide, diverging development opportunities, as well as the increasing financialization of economic activities. The Future Lab hence links and focuses on five core themes:

1. Design of Policy Instruments for the Global Commons

Well-thought policies can provide the right incentives to prevent the overuse of natural commons as well as the underprovision of social commons. We will analyze the effectiveness, fairness and economic efficiency of different types of policy instruments, such as carbon prices, subsidies or land taxes, among others. Informed by empirical research, we will also examine which (institutional and administrative) conditions are required for their successful implementation.

2. Inequality, Distribution and Redistribution

Policy instruments do not only affect the use of global commons but influence the distribution of income and wealth. This, in turn, may compromise social progress and normative goals but also influence support and feasibility in social and political decision making. More generally, high inequality and in particular poverty may become an obstacle to policies, such that lowering inequality becomes a prerequisite. We take into account the theoretical mechanisms of how specific policies affect different income groups and provide empirical applications. We also examine the impact of transfers within and across countries and their effectiveness on reducing poverty and inequality, while increasing the provision of natural commons.

3. The Political Economy of Managing the Global Commons

The effectiveness, credibility and robustness of policies can be severely impacted by political constraints. Affected stakeholders, for instance, can use their political influence to either block or promote the introduction of certain policies. The political economy analyses will include broader social aspects and processes that are relevant for policymaking, like the role of social norms, identity, or polarization and fractionalization of societies.

4. Private Finance and Capital Markets

Financing decisions by the private sector crucially determine the supply of capital for sustainable socio-economic development. For this reason, we analyze the role of financial market failures as potential obstacles to the sustainable redirection of investment flows. We aim for a better understanding of incentive and information problems in capital market to assess how they limit the transformative effect of carbon pricing. Based on such assessments,, we identify policies to overcome these frictions and improve private sector involvement (e.g. by means of de-risking instruments and financial regulation).

5. Public finance and green fiscal reforms

A focus is also the analysis of fiscal systems and governmental capacity to cope with climate damages or disasters. We focus on national, supranational and international fiscal policies and transfers or insurance schemes to secure sustainability. We examine the budgetary implications of policies for the sustainable management of the global commons. These include revenue generation from market-based environmental policies (such as taxes or auctioned permits) as well as spending needs (e.g. to support low-carbon technologies, but also to invest in social infrastructure).

The research undertaken within the Future Lab will be embedded in a welfare-theoretic approach that acknowledges the multi-dimensional nature of human well-being and environmental sustainability. As a consequence, our results will help to assess trade-offs and synergies between multiple policy objectives and hence make a valuable contribution to establish science as “map making” for policy makers.