We ask how externalities should be taxed when redistribution is costly. In our model, the government raises revenue using distortionary income and commodity taxes. If more or less productive people have identical tastes for an externality-generating activity, the government optimally imposes a Pigouvian tax equal to marginal damage from the externality, regardless of whether the tax is regressive. But if regressivity partly reflects different preferences across incomes, the tax optimally deviates from the Pigouvian benchmark to help redistribute income efficiently. The overall tax may be higher or lower, and may even reverse sign relative to the externality. We derive sufficient statistics for optimal policy and use them to study carbon taxation in the US. Throughout most of the income distribution, our empirical results imply an optimal carbon tax below marginal damage, but this reverses for high earners. Allowing heterogeneity within and across incomes attenuates schedules toward the Pigouvian benchmark.

This study examines the potential impacts of carbon taxation on Belgium’s economy, focusing on emissions reduction and fostering innovation. As a strong EU innovator, Belgium has yet to implement a carbon tax, despite falling short of its climate targets. Using a computable general equilibrium (CGE) model calibrated with a detailed Social Accounting Matrix (SAM) for Belgium, the research explores varying carbon tax levels and revenue recycling strategies, including innovation subsidies and labour tax reductions. The model captures the dynamic interplay between economic activity, sectoral transitions, emissions, and R&D investments. By integrating innovation dynamics into the CGE framework, this study offers a forward-looking analysis of how carbon taxes can support technological progress and economic resilience. The results aim to provide actionable insights for policymakers designing equitable environmental policies that balance decarbonization with economic competitiveness.

Fuel and vehicle taxes are key revenue sources in sub-Saharan Africa (SSA) and play a role in addressing externalities such as congestion, air pollution, and road damage. This paper draws on a new database covering fuel and vehicle taxes in 38 SSA countries, tracking reforms since 2014. The findings show that these taxes are poorly aligned with environmental objectives: most revenue comes from up-front vehicle purchase taxes, which are least effective at targeting externalities from vehicle use. Since 2014, purchase taxes have grown in importance as fuel taxes have lagged behind inflation. While some purchase taxes include environmental elements—such as higher rates for vehicles with larger engines—most countries tax expensive but cleaner vehicles more than cheaper, dirtier ones. Cars face much higher taxes than buses and trucks, creating loopholes for vehicles on the boundary, such as pickup trucks.

Climate change and energy poverty in low- and middle-income countries are global challenges that are sometimes in tension with each other. This paper analyzes a randomized intervention that addresses both: distribution of solar lights to replace kerosene lamps. The solar lights strongly reduce carbon emissions from kerosene by half, while at the same time lowering household expenditures and improving health and subjective wellbeing. Providing lights for free, rather than charging a co-pay, boosts take-up without lowering usage. Access to solar lights can therefore be a highly cost-effective climate intervention, which at the same time increases the welfare of the poor.