Work

Optimal Fiscal Policy in a Climate-Economy Model with Heterogeneous Households

Year: 2026

Type: article

Abstract: We study optimal fiscal policy to address climate change and inequality. We theoretically characterise optimal carbon and income taxes and quantify them for the US economy using a climate model calibrated to DICE. In contrast to the representative-agent setting, we find that (i) tax distortions have a negligible effect on the optimal carbon tax; (ii) inequality only slightly reduces it; (iii) the revenue from carbon taxes is optimally split about equally between reducing tax distortions and increasing transfers. Unlike the double-dividend policy, optimal carbon taxation has progressive welfare effects, and low-income households benefit even in the short run.

Source: The Economic Journal

DOI: 10.1093/ej/ueag006

Authors: Thomas Douenne, Albert Jan Hummel, Marcelo Pedroni

Institutions: University of Amsterdam, University of Groningen, Inter-American Development Bank

Language: English

Topic: Climate Change Policy and Economics

Subfield: Economics and Econometrics

Field: Economics, Econometrics and Finance

Domain: Social Sciences

SDGs: Climate action, Reduced inequalities, No poverty

Open Access status: green

OpenAlex ID: W7124573194

FWCI: 21.45

Cites: 59

Cited by: 3

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