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Does idiosyncratic risk matter for climate policy?

Richard Jaimes

No 19276, Vniversitas Económica from Universidad Javeriana - Bogotá

Abstract: This paper considers an overlapping generations model with idiosyncratic labor income risk and a climate externality. We illustrate analytically that market-based climate policies must be adjusted when there are other intertemporal distortions in the economy. Specifically, we show that under precautionary savings the government finds it optimal to tax capital and to correct the carbon price accordingly. In a numerical exercise, we find that idiosyncratic risk leads to an optimal capital income tax rate of 48% and a carbon price 11% lower than its Pigouvian level in the first best

Keywords: Fiscal policy; Optimal taxation; Externalities; Environmental policies. (search for similar items in EconPapers)
JEL-codes: E62 H21 H23 Q58 (search for similar items in EconPapers)
Pages: 30
Date: 2021-05-28
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-mac
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