Title : Optimal Fiscal Policy in a Climate-Economy Model with Heterogeneous Households
Speaker: Thomas Douenne (University of Amsterdam)
Time & venue: 16.02.2023, 14:15 – 15:45 / University of Potsdam- Center for Economic Policy Analysis, Room 2.31 (House 1) and online via Zoom.
Contact Person : Shushanik Margaryan (shushanik.margaryan@uni-potsdam.de)
Abstract
This paper studies optimal fiscal policy in a climate-economy model with heterogeneous agents. When individualized lump-sum taxation is not available, distortionary taxes on labor and capital income are levied to provide redistribution. The optimal pollution tax rule is then a modified Pigouvian formula that accounts for tax distortions, with the sign of this adjustment varying over time. In a quantitative analysis where the climate model is calibrated to DICE and the fiscal system to the one of the U.S., we show that tax distortions have a negligible effect on the optimal carbon tax, but inequalities reduce it by 5%. Optimal carbon taxation generates moderately negative but progressive welfare effects in the 21st century, large positive but regressive effects thereafter.
