Unequal Climate Policy in an Unequal World

Elisa Belfiori (), Daniel Carroll and Sewon Hur
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Elisa Belfiori: https://sites.google.com/site/elisabelfiori/home

No 427, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We study climate policy in an economy with heterogeneous households, two types of goods (clean and dirty), and a climate externality from the dirty good. Using household expenditure and emissions data, we document that low-income households have higher emissions per dollar spent than high-income households, making a carbon tax regressive. We build a model that captures this fact and study climate policies that are neutral with respect to the income distribution. A central feature of these policies is that resource transfers across consumers are ruled out. We show that the constrained optimal carbon tax in a heterogeneous economy is heterogeneous: Higher-income households face a higher rate. Our main result shows that when the planner is limited to a uniform carbon tax, the tax follows the Pigouvian rule but is lower than the unconstrained carbon tax. Finally, we embed this model into a standard incomplete markets framework to quantify the policy effects on the economy, climate and welfare, and we find a Pareto-improving result. The climate policy is welfare-improving for every consumer.

Keywords: carbon tax; inequality; consumption; welfare; climate change (search for similar items in EconPapers)
JEL-codes: D62 H23 Q54 (search for similar items in EconPapers)
Pages: 41
Date: 2024-07-16
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-res
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:98565

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