Macroeconomic Effects of an Energy Saving Policy in the Public Sector

Nearly all the macroeconomic literature on environmental policies deals with taxes and tradable permits. A policy instrument that still needs to be looked at is a switch in government expenditure away from environmentally-damaging goods, in particular fossil fuels, and toward resource- and energy-saving expenditure. We analyse such policy with a two-sector theoretical general equilibrium model. A composite good is produced with constant returns to scale, and a natural resource is extracted with diminishing returns and yields a differential rent to its owners. The government purchases natural resources and composite goods from private firms. We show that a switch in public spending from the natural resource to the composite good increases employment. It also raises private consumption and welfare if the initial share of resource in public spending is smaller than that of private consumption, or if the difference is small enough. Simulations show that last condition holds in France for energy