Conference Agenda

We study how a carbon tax and a pollution abatement subsidy interact with preexisting labor and capital taxes along the transition path to a low-carbon economy. Using an environmental dynamic stochastic general equilibrium model that features financial frictions, we simulate different options for returning carbon tax revenue or financing abatement subsidies –- either lump sum or by adjusting labor or capital tax rates. Some findings from the double dividend literature are substantially different along the transition path than they are in the long run. Our results demonstrate the importance of examining transition effects and fiscal policy in designing climate policy.

How should governments design climate policies in the presence of inequality, uninsurable risk, and fiscal constraints? To address this question, we develop a climate-economy model with incomplete markets and idiosyncratic labor-income risk, where Ricardian equivalence fails and optimal long-run capital taxes are positive, leading to important inter-temporal wedges. We analytically show that the optimal carbon tax equals the social cost of carbon (SCC) adjusted for fiscal distortions. Calibrating the model to the U.S., we show that these adjustments are quantitatively negligible: high levels of household inequality, income risk, and fiscal distortions do not, in themselves, justify lowering climate ambitions. Welfare gains under the optimal policy come almost entirely from efficiency and environmental amenities, with almost no effect on redistribution and insurance, and are fairly evenly distributed across households.

Policies to mitigate climate change are high on the political agenda and their distributional effects are actively discussed. This paper makes two contributions to this discussion. First, it empirically identifies the spatial dimension between rural and urban households as important for the distributional effects of carbon taxes, as rural households in Germany have a carbon footprint 2.2 tons larger than comparable urban households, about 12 percent of the average carbon footprint. Second, I build a quantitative spatial general equilibrium model to evaluate different policies of rebating carbon tax revenues in terms of their redistributive effects and their political support along the transition to clean technologies. I find that rebating carbon tax revenues as lump-sum transfers redistributes on average 8,000 Euros from rural to urban households, and thus finds a political majority only in the urban region. In contrast, place-based transfers which are set to avoid any spatial redistribution do not reduce the speed of transitioning to clean technologies and find political majorities in both regions. Finally, carbon taxes have sizeable general equilibrium effects on housing prices, mitigating the heterogeneous impact of the tax across space by a quarter as they increase urban relative to rural rents. In addition, they increase prices of non-emitting houses by 5 percent, while decreasing those of carbon-emitting houses by the same amount.

Emerging economies with large informal sectors have increasingly met additional revenue needs through greater reliance on the value-added tax (VAT), yet further VAT increases can be self-limiting when higher consumer prices divert activity into untaxed production. We compare two marginal revenue instruments: an invoice–credit VAT rate and an upstream carbon tax. In a two-sector model in which informal firms evade VAT on sales but bear embedded VAT via purchases of formal intermediates, we derive an implementable welfare ranking. A VAT increase raises the formal break-even price more than it raises informal marginal cost, contracting demand and formal output while expanding informality. An upstream energy tax, by contrast, does not mechanically widen the formal–informal wedge and, under empirically plausible cost-share conditions, raises a given marginal revenue target at lower welfare cost and with smaller consumer-price pass-through than an equivalent VAT increase, even before valuing emissions reductions. Carbon taxation should therefore be treated as a core fiscal tool in high-informality economies.