Unequal Climate Policy in an Unequal World

Elisa Belfiori, Daniel Carroll and Sewon Hur

No 427, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We characterize optimal climate policy in an economy with heterogeneous households and non-homothetic preferences. We focus on constrained efficiency, where the planner is restricted from transferring resources across households. We derive three results. First, the constrained-optimal carbon tax is heterogeneous and progressive. Second, if restricted to a uniform tax, the optimal rate is lower than the standard Pigouvian level due to inequality. Third, this allocation can be decentralized using only uniform instruments—a carbon tax, a clean subsidy and a lump-sum transfer. In a quantitative application, we show this policy generates a Pareto improvement, reconciling climate efficiency with inequality concerns.

Keywords: carbon tax; inequality; consumption; welfare; climate change (search for similar items in EconPapers)
JEL-codes: E21 H21 H23 Q54 (search for similar items in EconPapers)
Pages: 48
Date: 2024-07-16, Revised 2026-02-02
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-res
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Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:98565

DOI: 10.24149/gwp427r2

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