Pollution versus inequality: tradeoffs for fiscal policy

Camille Hainnaux and Thomas Seegmuller ()
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Camille Hainnaux: USMB [Université de Savoie] [Université de Chambéry] - Université Savoie Mont Blanc
Thomas Seegmuller: AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique

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Abstract: This paper investigates the effect of taxation of polluting products and redistribution on pollution, income and welfare inequalities. We consider a two-sector Ramsey model with a green and a polluting good, two types of households and a subsistence level of consumption for the polluting good. The environmental tax is always effective in reducing pollution regardless of the level of subsistence consumption. However, this level, together with the redistribution rate, matters at the individual level as it shapes the impact of the environmental policy on individual consumption and welfare. Looking at the stability properties of the economy, a high subsistence level of polluting consumption leads to instability or indeterminacy of the steady state, while the environmental externality reduces the scope for indeterminacy. Increasing the tax rate and redistributing more to the worker affect the occurrence of indeterminacy and instability. Considering the subsistence level of consumption and the level of redistribution among households are of importance as it determines the effects of environmental tax policy in the long term and the stability of the economy in the short term.

Keywords: taxation; redistribution; pollution; inequality; heterogeneous agents; Externalities (search for similar items in EconPapers)
Date: 2025-10-15
New Economics Papers: this item is included in nep-env and nep-mac
Note: View the original document on HAL open archive server: https://amu.hal.science/hal-05538367v1
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Published in Macroeconomic Dynamics, 2025, 29, pp.e150. ⟨10.1017/S1365100525100515⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05538367

DOI: 10.1017/S1365100525100515

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