Does idiosyncratic risk matter for climate policy?
Richard Jaimes
Environment and Development Economics, 2023, vol. 28, issue 4, 353-367
Abstract:
This paper studies the implications of distortions in intertemporal margins for the conduct of climate policy. We do so by introducing a framework that combines a standard two-period overlapping generations (OLG) model with a tractable model of household heterogeneity, in which over-accumulation of capital arises from uninsurable idiosyncratic labor income risk. We illustrate that market-based climate policies must be adjusted when the government cannot provide full insurance to households by taxing only capital and is constrained to transfer resources across generations for risk-sharing. In a numerical exercise, we find that idiosyncratic risk leads to an optimal capital income tax rate of 35 per cent and a carbon price 7.5 per cent lower than its first best.
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:cup:endeec:v:28:y:2023:i:4:p:353-367_3
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