Optimal carbon taxation and horizontal equity: A welfare-theoretic approach with application to German household data

Martin C. Hänsel (), Max Franks, Matthias Kalkuhl and Ottmar Edenhofer
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Martin C. Hänsel: Potsdam Institute for Climate Impact Research

No 28, CEPA Discussion Papers from Center for Economic Policy Analysis

Abstract: We develop a model of optimal carbon taxation and redistribution taking into account horizontal equity concerns by considering heterogeneous energy efficiencies. By deriving first- and second-best rules for policy instruments including carbon taxes, transfers and energy subsidies, we then investigate analytically how horizontal equity is considered in the social welfare maximizing tax structure. We calibrate the model to German household data and a 30 percent emission reduction goal. Our results show that energy-intensive households should receive more redistributive resources than energy-efficient households if and only if social inequality aversion is sufficiently high. We further find that redistribution of carbon tax revenue via household-specific transfers is the first-best policy. Equal per-capita transfers do not suffer from informational problems, but increase mitigation costs by around 15 percent compared to the first- best for unity inequality aversion. Adding renewable energy subsidies or non-linear energy subsidies, reduces mitigation costs further without relying on observability of households’ energy efficiency.

Keywords: carbon price; horizontal equity; redistribution; renewable energy subsidies; climate policy; just transition (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-ene and nep-env
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Citations: View citations in EconPapers (3)

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Journal Article: Optimal carbon taxation and horizontal equity: A welfare-theoretic approach with application to German household data (2022)
Working Paper: Optimal Carbon Taxation and Horizontal Equity: A Welfare-Theoretic Approach with Application to German Household Data (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:pot:cepadp:28

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