Optimal Climate Policy, Distortionary Taxation, and Public Debt

Rym Aloui () and Hafedh Bouakez ()
Additional contact information
Rym Aloui: UL2 UFR SEG - Université Lumière - Lyon 2 - UFR de Sciences économiques et de gestion - UL2 - Université Lumière - Lyon 2, GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne - UL2 - Université Lumière - Lyon 2 - UJM - Université Jean Monnet - Saint-Étienne - EM - EMLyon Business School - CNRS - Centre National de la Recherche Scientifique
Hafedh Bouakez: HEC Montréal - HEC Montréal

Working Papers from HAL

Abstract: We derive the (second-best) optimal carbon tax in a polluted economy with preexisting tax distortions and in which labor and capital income taxes adjust endogenously to changes in the ratio of public debt to GDP via pre-established fiscal rules. Relative to the no-climate-policy scenario, the welfare-maximizing carbon tax lowers the debt-to-GDP ratio as well as labor and capital income taxes, while raising GDP and consumption. The strength of these effects depends on the aggressiveness of the tax rules. The less aggressive they are, the larger the decline in the debt-to-GDP ratio, but the smaller the optimal carbon tax and the resulting increase in GDP, consumption, and welfare. We also show that, for given fiscal rules, the optimal carbon tax and welfare gain are smaller the larger preexisting tax distortions.

Keywords: JEL Classification: E32 E62 F41 H54; JEL Classification: E32; E62; F41; H54 (search for similar items in EconPapers)
Date: 2025-02-12
Note: View the original document on HAL open archive server: https://hal.science/hal-04942569v1
References: Add references at CitEc
Citations:

Downloads: (external link)
https://hal.science/hal-04942569v1/document (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:hal:wpaper:hal-04942569

Access Statistics for this paper

More papers in Working Papers from HAL
Bibliographic data for series maintained by CCSD ().