At this Grantham Workshop, Armon Rezai will discuss his paper ‘Carbon Taxation and Income Distribution’.  


‘We estimate an EASI demand system with nonlinear Engel curves, a labour supply schedule, and an income tax schedule from German household data. We combine this with a model of households’ and firms’ carbon emissions to obtain a simulation model of the German economy. The policy instruments of the government are a specific carbon tax, a climate dividend, and two parameters for the level and progressivity of income taxes. In most cases, the second-best optimum prices carbon below its Pigouvian rate and distributes the proceeds of carbon taxation as climate dividends. Both, carbon tax and dividends, increase with society’s degree of inequality aversion. At higher degrees of inequality aversion, the carbon tax exceeds the Pigouvian. Whenever available, policy makers favour climate dividends over double dividend reforms in our calibrated model.’

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