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Optimal Fiscal Policy in a Climate-Economy Model with Heterogeneous Households
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DOI：10.1093/ej/ueag006.png)
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Abstract
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We study optimal fiscal policy to address climate change and inequality. We theoretically characterise optimal carbon and income taxes and quantify them for the US economy using a climate model calibrated to DICE. In contrast to the representative-agent setting, we find that (i) tax distortions have a negligible effect on the optimal carbon tax; (ii) inequality only slightly reduces it; (iii) the revenue from carbon taxes is optimally split about equally between reducing tax distortions and increasing transfers. Unlike the double-dividend policy, optimal carbon taxation has progressive welfare effects, and low-income households benefit even in the short run.
Keywords:
OPTIMAL TAXATION
CARBON TAX
GENERAL-EQUILIBRIUM
DISTRIBUTIONAL IMPACTS
SOCIAL COST
INCOME
CONSUMPTION
REDISTRIBUTION
EXTERNALITIES
EMISSIONS
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