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Optimal Climate and Fiscal Policy in an OLG economy

Richard Jaimes

No 19283, Vniversitas Económica from Universidad Javeriana - Bogotá

Abstract: This paper develops a climate–economy model to study the joint design of optimal climate and fiscal policies in economies with overlapping generations. I demonstrate how capital taxation, if optimal, drives a wedge between the market costs of carbon (the net present value of marginal damages using the market interest rate) and the Pigouvian tax (the net present value of marginal damages using the consumption discount rate of successive overlapping generations). In contrast to deterministic infinitely-lived representative agent models, at the optimum, the capital income tax is positive, the carbon price equals the market costs of carbon but it falls short of the Pigouvian tax when (i) preferences are not separable over consumption and leisure; and (ii) labor income taxes cannot be age-dependent. I also show that restrictions on climate change policy provide a novel rationale for positive capital income taxes.

Keywords: Climate change; Environmental policies; Externalities; Fiscal policy; Optimaltaxation. (search for similar items in EconPapers)
JEL-codes: E62 H21 H23 Q58 (search for similar items in EconPapers)
Pages: 63
Date: 2021-06-04
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:col:000416:019283

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