Unequal Climate Policy in an Unequal World

Elisa Belfiori, Daniel Carroll and Sewon Hur

No 12443, CESifo Working Paper Series from CESifo

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 is decentralizable using only uniform instruments - a carbon tax, clean subsidy, and a lumpsum 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)
Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12443

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