Optimal Fiscal Policy in a Climate-Economy Model with Heterogeneous Households

Thomas Douenne, Albert Jan Hummel and Marcelo Pedroni

No 19151, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study optimal fiscal policy to address climate change and inequality. We theoretically characterize optimal carbon and income taxes and quantify them for the US economy with a climate model calibrated to DICE. In contrast to the representative-agent setting, we find that (i) tax distortions have a negligible effect on the optimal carbon tax; (ii) inequality only slightly reduces it; (iii) the revenue from carbon taxes is optimally split halfway between reducing tax distortions and increasing transfers. Unlike the double-dividend policy, optimal carbon taxation has progressive welfare effects and low-income households benefit even in the short run.

JEL-codes: E62 H21 H23 Q5 (search for similar items in EconPapers)
Date: 2024-06
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