Optimal Climate Policy: Making do with the taxes we have

This paper studies the optimal climate policy in an economy that faces constraints on the availability of policy instruments. In a standard macro-climate growth model that includes a carbon emissions externality, the optimal policy is the introduction of a global carbon tax. After years of climate negotiations and no success in the introduction of a carbon price, this paper suggests an alternative approach which is to look for the best policies that the global economy can seek constrained by the fact that a global carbon tax is not an available tool. We show that standard fiscal instruments – not often included in the climate negotiations - are capable of achieving the optimal outcome. We theoretically characterize and quantitatively estimate the optimal tax rates, and we find that they are well within existing tax rates. These results suggest that there is value in broadening the discussion on climate policies by exploring the role that standard taxes, such as income and consumption taxes, can play in tackling the climate problem. Politicians might be keener on recalibrating the tax rate on existing taxes than on introducing new taxes.