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Carbon taxation and precautionary savings

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  • Stefan Wöhrmüller

Abstract

How does uninsurable idiosyncratic risk shape the optimal design of carbon taxation? To answer this question, I augment a heterogeneous-agent incomplete-markets model with a climate externality on total factor productivity and dirty energy demand of households and firms. A government sets a carbon tax on energy and redistributes its revenue via lump-sum transfers. When labor tax instruments are held fixed, I find that the optimal carbon tax rises with the level of uninsurable idiosyncratic risk. In contrast, when labor taxes can adjust, the carbon tax remains relatively stable across different economic environments. Overall, welfare gains are primarily driven by improved insurance provision.

Suggested Citation

  • Stefan Wöhrmüller, 2025. "Carbon taxation and precautionary savings," Working Papers 841, DNB.
    • Handle: RePEc:dnb:dnbwpp:841
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    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General

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