Fiscal Policy for Climate Change

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.