@article{HaenselFranksKalkuhletal.2022,
  author    = {H{\"a}nsel, Martin C. and Franks, Max and Kalkuhl, Matthias and Edenhofer, Ottmar},
  title     = {Optimal carbon taxation and horizontal equity},
  series = {Journal of environmental economics and management},
  volume    = {116},
  journal   = {Journal of environmental economics and management},
  publisher = {Elsevier},
  address   = {Amsterdam},
  issn      = {0095-0696},
  doi       = {10.1016/j.jeem.2022.102730},
  year      = {2022},
  abstract  = {We develop a model of optimal taxation and redistribution under an ambitious climate target. We take into account vertical income differences, but also explicitly capture horizontal equity concerns by considering heterogeneous energy efficiencies. By deriving first- and second-best rules for policy instruments including carbon and labor taxes, transfers and energy subsidies, we investigate analytically how vertical and horizontal inequality is considered in the welfare maximizing tax structure. We calibrate the model to German household data and a 30 percent emission reduction goal and show that redistribution of carbon tax revenues via household-specific transfers is the first-best policy. Under plausible assumptions on inequality aversion, transfers to energy-intensive households should be about five times higher than transfers to energy-efficient households. Equal per-capita transfers do not require to observe households' efficiency type, but increase equity-weighted mitigation costs by around 5 percent compared to the first-best. Mitigation costs increase by less, if the government can implement a uniform clean energy subsidy or household-specific tax-subsidy schemes on energy consumption and labor income that target heterogeneous energy efficiencies. Horizontal equity concerns may therefore constitute a new second-best rationale for clean energy policies or differentiated energy taxes.},
  language  = {en}
}
@techreport{HaenselFranksKalkuhletal.2021,
  type      = {Working Paper},
  author    = {H{\"a}nsel, Martin C. and Franks, Max and Kalkuhl, Matthias and Edenhofer, Ottmar},
  title     = {Optimal carbon taxation and horizontal equity},
  series = {CEPA Discussion Papers},
  journal   = {CEPA Discussion Papers},
  number    = {28},
  issn      = {2628-653X},
  doi       = {10.25932/publishup-49812},
  url       = {http://nbn-resolving.de/urn:nbn:de:kobv:517-opus4-498128},
  pages     = {51},
  year      = {2021},
  abstract  = {We develop a model of optimal carbon taxation and redistribution taking into account horizontal equity concerns by considering heterogeneous energy efficiencies. By deriving first- and second-best rules for policy instruments including carbon taxes, transfers and energy subsidies, we then investigate analytically how horizontal equity is considered in the social welfare maximizing tax structure. We calibrate the model to German household data and a 30 percent emission reduction goal. Our results show that energy-intensive households should receive more redistributive resources than energy-efficient households if and only if social inequality aversion is sufficiently high. We further find that redistribution of carbon tax revenue via household-specific transfers is the first-best policy. Equal per-capita transfers do not suffer from informational problems, but increase mitigation costs by around 15 percent compared to the first- best for unity inequality aversion. Adding renewable energy subsidies or non-linear energy subsidies, reduces mitigation costs further without relying on observability of households' energy efficiency.},
  language  = {en}
}