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Making Carbon Taxation A Generational Win Win

Author

Listed:
  • Laurence J. Kotlikoff

    (Boston University and NBER)

  • Felix Kubler

    (University of Zurich and Swiss Financial Institute)

  • Andrey Polbin

    (The Russian Presidential Academy of National Economy and Public Administration, and The Gaidar Institute for Economic Policy)

  • Jeffrey D. Sachs

    (Columbia University and NBER)

  • Simon Scheidegger

    (University of Lausanne Department of Finance)

Abstract

Carbon taxation has been studied primarily in social planner or infinitely lived agent models, which trade off the welfare of future and current generations. Such frameworks obscure the potential for carbon taxation to produce a generational win-win. This paper develops a large-scale, dynamic 55-period, OLG model to calculate the carbon tax policy delivering the highest uniform welfare gain to all generations. The OLG framework, with its selfish generations, seems far more natural for studying climate damage. Our model features coal, oil, and gas, each extracted subject to increasing costs, a clean energy sector, technical and demographic change, and Nordhaus (2017)'s temperature/damage functions. Our model's optimal uniform welfare increasing (UWI) carbon tax starts at $30 tax, rises annually at 1.5 percent and raises the welfare of all current and future generations by 0.73 percent on a consumption-equivalent basis. Sharing efficiency gains evenly requires, however, taxing future generations by as much as 8.1 percent and subsidizing early genrations by as much as 1.2 percent of lifetime consumption. Without such redistribution (the Nordhaus “optimum†), the carbon tax constitutes a win-lose policy with current generations experiencing an up to 0.84 percent welfare loss and future generations experiencing an up to 7.54 percent welfare gain. With a six-times larger damage function, the optimal UWI initial carbon tax is $70, again rising annually at 1.5 percent. This policy raises all generations’ welfare by almost 5 percent. However, doing so requires levying taxes on and giving transfers to future and current generations ranging up to 50.1 percent and 10.3 percent of their lifetime consumption. Delaying carbon policy, for 20 years, reduces efficiency gains roughly in half.

Suggested Citation

  • Laurence J. Kotlikoff & Felix Kubler & Andrey Polbin & Jeffrey D. Sachs & Simon Scheidegger, 2019. "Making Carbon Taxation A Generational Win Win," Boston University - Department of Economics - Working Papers Series WP2020-002, Boston University - Department of Economics.
  • Handle: RePEc:bos:wpaper:wp2020-002
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    1. Making Carbon Taxation a Generational Win Win
      by Christian Zimmermann in NEP-DGE blog on 2019-05-02 17:49:32

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    3. Laurence Kotlikoff & Felix Kubler & Andrey Polbin & Simon Scheidegger, 2021. "Pareto-improving carbon-risk taxation [The environment and directed technical change]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 36(107), pages 551-589.
    4. Frederick van der Ploeg & Armon Rezai, 2020. "Stranded Assets in the Transition to a Carbon-Free Economy," Annual Review of Resource Economics, Annual Reviews, vol. 12(1), pages 281-298, October.
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    7. Wolfgang Pointner & Doris Ritzberger-Grünwald, 2019. "Climate change as a risk to financial stability," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 38, pages 30-45.
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    10. Arnaud Goussebaïle, 2024. "Democratic Climate Policies with Overlapping Generations," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(5), pages 1249-1273, May.
    11. Abiry, Raphael & Ferdinandusse, Marien & Ludwig, Alexander & Nerlich, Carolin, 2022. "Climate change mitigation: How effective is green quantitative easing?," ZEW Discussion Papers 22-027, ZEW - Leibniz Centre for European Economic Research.
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    13. Richard S.J. Tol, 2021. "Estimates of the social cost of carbon have not changed over time," Working Paper Series 0821, Department of Economics, University of Sussex Business School.
    14. Kotlikoff, Laurence & Kubler, Felix & Polbin, Andrey & Scheidegger, Simon, 2024. "Can today’s and tomorrow’s world uniformly gain from carbon taxation?," European Economic Review, Elsevier, vol. 168(C).
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    16. Arnaud Goussebaïle, 2022. "Democratic Climate Policies with Overlapping Generations," CER-ETH Economics working paper series 22/374, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    17. Arik Sadeh & Claudia Florina Radu & Cristina Feniser & Andrei Borşa, 2020. "Governmental Intervention and Its Impact on Growth, Economic Development, and Technology in OECD Countries," Sustainability, MDPI, vol. 13(1), pages 1-30, December.
    18. Andersen, Torben M. & Bhattacharya, Joydeep & Liu, Pan, 2020. "Resolving intergenerational conflict over the environment under the Pareto criterion," Journal of Environmental Economics and Management, Elsevier, vol. 100(C).
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    20. Rezgar FEIZI & Sahar AMIDI & Thais NUNEZ-ROCHA & Isabelle RABAUD, 2022. "Carbon Tax and Emissions Transfer: a Spatial Analysis," LEO Working Papers / DR LEO 2965, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    21. Richard S. J. Tol, 2021. "Estimates of the social cost of carbon have increased over time," Papers 2105.03656, arXiv.org, revised Aug 2022.
    22. Braga, Joao Paulo & Semmler, Willi & Grass, Dieter, 2021. "De-risking of green investments through a green bond market – Empirics and a dynamic model," Journal of Economic Dynamics and Control, Elsevier, vol. 131(C).
    23. Lennard Schlattmann, 2024. "Spatial Redistribution of Carbon Taxes," ECONtribute Discussion Papers Series 345, University of Bonn and University of Cologne, Germany.
    24. Svenn Jensen & Christian P. Traeger & Christian Träger, 2021. "Pricing Climate Risk," CESifo Working Paper Series 9196, CESifo.

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    16. Arnaud Goussebaïle, 2022. "Democratic Climate Policies with Overlapping Generations," CER-ETH Economics working paper series 22/374, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    17. Lee H. Endress & Sittidaj Pongkijvorasin & James Roumasset & Christopher Wada, 2013. "Intergenerational Equity with Individual Impatience in an OLG Model of Optimal and Sustainable Growth," Working Papers 2013-9, University of Hawaii Economic Research Organization, University of Hawaii at Manoa.
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    JEL classification:

    • F0 - International Economics - - General
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • H0 - Public Economics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • J20 - Labor and Demographic Economics - - Demand and Supply of Labor - - - General

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