Unequal Climate Policy in an Unequal World

Elisa Belfiori, Daniel Carroll and Sewon Hur

No 427, Globalization Institute Working Papers from Federal Reserve Bank of Dallas

Abstract: We study climate policy in an economy with heterogeneous households, two types of goods (clean and dirty), and a climate externality from the dirty good. Using household expenditure and emissions data, we document that low-income households have higher emissions per dollar spent than high-income households, making a flat carbon tax regressive. We build a model that captures this fact and study climate policies that are neutral with respect to the income distribution. We show that the constrained optimal carbon tax in a heterogeneous economy is heterogeneous: Higher-income households face a higher rate. If uniformity of the carbon tax is desired, this property must be imposed as an additional constraint. In this case, the tax is lower than the unconstrained carbon tax. Finally, we embed this model into a standard incomplete markets framework to quantify the policy effects on the economy, climate and welfare, and we find a Pareto-improving result. The uniform climate policy is welfare-improving for every household.

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)
Pages: 45
Date: 2024-07-16, Revised 2025-01-31
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env and nep-res
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.dallasfed.org/~/media/documents/resear ... pers/2024/0427r1.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:feddgw:98565

DOI: 10.24149/gwp427r1

Access Statistics for this paper

More papers in Globalization Institute Working Papers from Federal Reserve Bank of Dallas Contact information at EDIRC.
Bibliographic data for series maintained by Amy Chapman ().