the end of the estimation sample spill over to the projection period. Consistent with OECD (2022), we limit the policy rate hike, which the model predicts, to capture the current monetary policy stance in T ̈urkiye. This affects the public debt trajectory, too. Hence, we adjust government consumption to maintain the initially projected path of public debt. This path matches the recent IMF (2022) forecast. In the baseline, variables converge to their steady growth path in the long run. Labor productivity is assumed to grow by 4% per year, which drives the growth of all trending variables, including baseline emissions.<sup>13</sup>

# **4.1 Dynamic multiplier effects of climate-fiscal interventions**

To identify a climate-smart policy mix under feasibility constraints, it is conducive to first study the macro implications of the core climate-fiscal policy interventions. We consider a carbon tax, a renewable energy subsidy, public investment in renewable energy generation, and public investment in renewable energy infrastructure below and above the satiation point. The policy interventions are permanent and phased in with an auto-regressive parameter of 0.8. We normalize each policy shock to 1 billion (bn) 2015 USD before any macroeconomic adjustment occurs. This corresponds to around 0.1% of 2021 GDP.

Figure 3 reports the impulse-response functions (IRFs) for critical macroeconomic indicators. First, note that while the policy impulse of $1bn is the same for each instrument, the fiscal implications differ over time. For instance, the carbon tax decreases the public deficit only by around $0.7bn. This is because the tax successfully reduces emissions and erodes its base. In contrast, raising the renewable subsidy rate increases the fiscal stimulus over time as renewable energy expands. Hence, the primary deficit slightly overshoots 1bn after ten years. Renewable infrastructure investments of $1bn cause a primary deficit of $1.5bn after ten years, assuming the satiation point is unmet. This is because of the decline in fuel tax revenues.

Second, infrastructure investment below the satiation point is highly effective in reducing emissions. This is consistent with Way et al. 2022 who argue that insufficient infrastructure investment may be a bottleneck for the low-carbon transition. Ten years after the policy change, $1bn of additional annual spending reduce emissions by around 40 million (mn) tonnes per year. By the same time, annual renewable energy production increases to around 6mn tonnes of oil equivalent (toe), and annual fossil energy production decreases by 5mn toe. In comparison, the carbon tax and the renewable energy subsidy reduce emissions only by around 6mn tonnes per year after 10 years. The carbon tax achieves this mainly by reducing the energy intensity of production and the subsidy by spurring renewable energy production. Both public investment in renewable generation and infrastructure at the sa-

> 13Note that the baseline scenario abstracts from two important developments: First, it neglects the Carbon Border Adjustment Mechanism which the European Union intends to implement on its imports. Hence, the baseline projections of Turkish exports may be too optimistic. Second, the baseline neglects the productivity spill-overs from scaling up renewable energy production in the RW. It is, therefore, likely to underestimate the baseline emission reductions.

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