Fiscal Policy for Climate Change

Research Seminars

Fiscal policy offers a number of levers to reduce carbon emissions. Climate change mitigation can for example be implemented through carbon taxation on the production or consumption side, or through debt-financed public investments in emission-reducing infrastructure. Yet these various instruments may differ significantly in their cost-effectiveness in reducing emissions and in their distributional impacts among households. The paper presented in this Research Seminar develops a macroeconomic heterogeneous-agent model with environmental externalities to address both of these questions. In this model, households derive utility from the consumption of carbon-intensive and clean goods, and from the environmental damages resulting from CO2 emissions. In addition, CO2 emissions affect productivity and thus relative prices. The authors use household data on the distribution carbon-intensive goods consumption to estimate preference parameters. Starting from a realistic fiscal structure, they then implement various tax reforms to analyze their effects on both CO2 emissons and consumption along the consumption distribution.