Climate Policy and Inequality in Two-Dimensional Political Competition

Waldemar Marz

No 319, ifo Working Paper Series from ifo Institute - Leibniz Institute for Economic Research at the University of Munich

Abstract: This paper examines how income inequality can affect the polarization of heterogeneous party platforms on climate policy (here: carbon tax). The implied consequences for the uncertainty of climate policy can be relevant for risk-averse investors in "green" technologies. Households are heterogeneous with respect to income and preferences for environmentalism and preferred redistribution. A static gametheoretic model of two-dimensional political competition on a carbon tax (with distributional implications) and an income tax is combined with a model of a carbonintensive economy. For a higher inequality of pre-tax income and/or a higher salience of the issue of redistribution, polarization of the parties’ carbon tax proposals in the equilibrium can increase - even if the income tax is used to counteract the increase in income inequality. This result does not depend on the progressivity of the carbon-tax revenue recycling mechanism.

Keywords: Climate policy; inequality; political economy; multidimensional political competition (search for similar items in EconPapers)
JEL-codes: H23 P16 Q52 Q54 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ene, nep-env and nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ifowps:_319

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