Optimal carbon taxation and horizontal equity

  • 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, reducesWe 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.show moreshow less

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Metadaten
Author details:Martin C. HänselORCiDGND, Max FranksORCiDGND, Matthias KalkuhlORCiDGND, Ottmar EdenhoferORCiDGND
URN:urn:nbn:de:kobv:517-opus4-498128
DOI:https://doi.org/10.25932/publishup-49812
ISSN:2628-653X
Title of parent work (English):CEPA Discussion Papers
Subtitle (English):A welfare-theoretic approach with application to German household data
Publication series (Volume number):CEPA Discussion Papers (28)
Publication type:Working Paper
Language:English
Date of first publication:2021/03/11
Publication year:2021
Publishing institution:Universität Potsdam
Release date:2021/03/11
Tag:carbon price; climate policy; horizontal equity; just transition; redistribution; renewable energy subsidies
Issue:28
Number of pages:51
RVK - Regensburg classification:QT 800, QT 200, QD 020, AR 28100
Organizational units:Extern / Extern
Zentrale und wissenschaftliche Einrichtungen / Center for Economic Policy Analysis (CEPA)
Wirtschafts- und Sozialwissenschaftliche Fakultät / Wirtschaftswissenschaften / Fachgruppe Volkswirtschaftslehre
DDC classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Peer review:Nicht referiert
License (German):License LogoKeine öffentliche Lizenz: Urheberrechtsschutz
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