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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.
The employment implications of decarbonizing the energy sector have received far less attention than the technology dimension of the transition, although being of critical importance to policymakers. In this work, we adapt a methodology based on employment factors to project future changes in quantity and composition of direct energy supply jobs for two scenarios - (1) relatively weak emissions reductions as pledged in the nationally determined contributions (NDC) and (2) stringent reductions compatible with the 1.5 °C target. We find that in the near-term the 1.5°C-compatible scenario results in a net increase in jobs through gains in solar and wind jobs in construction, installation, and manufacturing, despite significant losses in coal fuel supply; eventually leading to a peak in total direct energy jobs in 2025. In the long run, improvements in labour productivity lead to a decrease of total direct energy employment compared to today, however, total jobs are still higher in a 1.5 °C than in an NDC scenario. Operation and maintenance jobs dominate future jobs, replacing fuel supply jobs. The results point to the need for active policies aimed at retraining, both inside and outside the renewable energy sector, to complement climate policies within the concept of a “just transition”.