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The Distributional Implications of Climate Policies Under Uncertainty

Ulrich Eydam

No 33, CEPA Discussion Papers from Center for Economic Policy Analysis

Abstract: Promoting the decarbonization of economic activity through climate policies raises many questions. From a macroeconomic perspective, it is important to understand how these policies perform under uncertainty, how they affect short-run dynamics and to what extent they have distributional effects. In addition, uncertainties directly associated with climate policies, such as uncertainty about the carbon budget or emission intensities, become relevant aspects. We study the implications of emission reduction schemes within a Two-Agent New-Keynesian (TANK) model. This quantitative exercise, based on data for the German economy, provides various insights. In the light of frictions and fluctuations, compared to other instruments, a carbon price (i.e. tax) is associated with lower volatility in output and consumption. In terms of aggregate welfare, price instruments are found to be preferable. Conditional on the distribution of revenues from climate policies, quantity instruments can exert regressive effects, posing a larger economic loss on wealth-poor households, whereas price instruments are moderately progressive. Finally, we find that unexpected changes in climate policies can induce substantial aggregate adjustments. With uncertainty about the carbon budget, the costs of adjustment are larger under quantity instruments.

Keywords: macroeconomic dynamics; environmental policy; inequality; policy design (search for similar items in EconPapers)
JEL-codes: E32 E61 Q52 Q58 (search for similar items in EconPapers)
Date: 2021-06
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-mac and nep-res
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