 THIRD-BEST CARBON TAXATION: Trading off Emission Cuts, Equity, and EfficiencyFrederick van der Ploeg, Armon Rezai and Miguel Tovar No 19612, CEPR Discussion Papers from Centre for Economic Policy Research Abstract: We analyse carbon taxes, lump-sum climate dividends, and changes to the level and progressivity of the income tax system that optimally trade off carbon emissions, equity, and efficient raising of public revenue while preserving budgetary neutrality and not using individualized lump-sum transfers. Such “third-best†policies include a carbon tax that exceeds the Pigouvian level and recycling of all carbon tax revenue via climate dividends for high (and our preferred) degrees of inequality aversion, even if this implies higher income taxes to meet existing revenue requirements. The carbon tax, climate dividends, and the progressivity of the income tax rise with the degree of inequality aversion. Our results are derived from a micro simulation model estimated from German data, which includes heterogenous households, an Exact Affine Stone Index demand system, and endogenous labour supply. We decompose the welfare effects of policy into emissions, equity, and efficiency components for different degrees of inequality aversion and climate damages. JEL-codes: D12 D31 D62 D63 H23 J22 Q5 (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:19612 Ordering information: This working paper can be ordered from Access Statistics for this paper More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK. |
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