Tax-financed green policies and income inequality in an agent-based model

Growing concern over the climate crisis has recently spurred decarbonization efforts across numerous economies. The overarching aim is to reconfigure productive systems so as to decouple carbon emissions from gross domestic product (GDP) growth. However, these structural shifts are inherently complex, meaning their full macroeconomic repercussions cannot be entirely anticipated in advance. This paper focuses on one key aspect: the impact on income distribution. It develops an agent-based model (ABM) to explore how different tax-financed green policies affect income inequality. The central question is whether—and under what conditions—it is possible to achieve GDP growth, reduced carbon emissions, and lower income inequality simultaneously. As decarbonization requires both financing and environmental policy instruments, this paper simulates various combinations of these tools. The simulations examine scenarios where tax instruments—either a carbon tax or a wealth tax—finance the following green policies: (i) price subsidy for the least polluting firms, (ii) public non-patented green R&D, (iii) subsidy for private green R&D, and (iv) green public procurement. While the carbon tax is both as a financing mechanism and an environmental policy tool, the wealth tax is primarily a means of income redistribution. Our findings show how this distinction crucially shapes the interplay between GDP growth, carbon emissions, and income distribution.