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Optimal Fiscal Policy in a Climate-Economy Model with Heterogeneous Households

Author

Listed:
  • Douenne, Thomas
  • Hummel, Albert Jan
  • Pedroni, Marcelo

Abstract

We study optimal fiscal policy to address climate change and inequality. We theoretically characterize optimal carbon and income taxes and quantify them for the US economy with 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 halfway 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.

Suggested Citation

  • Douenne, Thomas & Hummel, Albert Jan & Pedroni, Marcelo, 2024. "Optimal Fiscal Policy in a Climate-Economy Model with Heterogeneous Households," CEPR Discussion Papers 19151, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:19151
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    More about this item

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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