Optimal climate and monetary–fiscal policies in a climate-DSGE framework

This paper studies the optimal design of climate, fiscal, and monetary policies in response to climate-specific shocks within a climate-DSGE framework. We show that carbon taxes significantly mitigate the effects of climate shocks on output, consumption, and welfare, while optimal monetary policy is largely unaffected and fiscal policy adjusts via lower labor taxes. Extending the model with a richer climate module and abatement costs, we find that the assumed damage function is crucial: under a standard quadratic specification, climate policy has little effect on conventional macroeconomic shocks, but a highly convex, Weitzman-type damage function makes carbon taxation materially relevant. Accounting for climate fiscal outlays further raises optimal abatement and reduces emissions. Our results highlight the importance of integrating both macroeconomic and environmental considerations when designing policy.