Carbon taxation and precautionary savings

Stefan Wöhrmüller

Working Papers from DNB

Abstract: How does uninsurable idiosyncratic risk shape the optimal design of carbon taxation? To answer this question, I augment a heterogeneous-agent incomplete-markets model with a climate externality on total factor productivity and dirty energy demand of households and firms. A government sets a carbon tax on energy and redistributes its revenue via lump-sum transfers. When labor tax instruments are held fixed, I find that the optimal carbon tax rises with the level of uninsurable idiosyncratic risk. In contrast, when labor taxes can adjust, the carbon tax remains relatively stable across different economic environments. Overall, welfare gains are primarily driven by improved insurance provision.

Keywords: heterogeneous agents; precautionary savings; carbon taxation (search for similar items in EconPapers)
JEL-codes: D31 D52 E21 H21 Q50 (search for similar items in EconPapers)
Date: 2025-09
New Economics Papers: this item is included in nep-dge and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:dnb:dnbwpp:841

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