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  Optimal carbon taxation and horizontal equity: A welfare-theoretic approach with application to German household data

Hänsel, M. C., Franks, R. M., Kalkuhl, M., Edenhofer, O. (2022): Optimal carbon taxation and horizontal equity: A welfare-theoretic approach with application to German household data. - Journal of Environmental Economics and Management, 116, 102730.
https://doi.org/10.1016/j.jeem.2022.102730

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 Creators:
Hänsel, Martin C.1, Author              
Franks, R. Maximilian1, Author              
Kalkuhl, Matthias2, Author
Edenhofer, Ottmar1, Author              
Affiliations:
1Potsdam Institute for Climate Impact Research, ou_persistent13              
2External Organizations, ou_persistent22              

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Free keywords: Carbon price, Optimal taxation, Horizontal equity, Redistribution, Clean energy subsidies, Climate policy, Just transition
 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.

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Language(s): eng - English
 Dates: 2021-02-262022-09-092022-10-13
 Publication Status: Finally published
 Pages: 26
 Publishing info: -
 Table of Contents: -
 Rev. Type: Peer
 Identifiers: DOI: 10.1016/j.jeem.2022.102730
MDB-ID: yes - 3500
PIKDOMAIN: Director / Executive Staff / Science & Society
PIKDOMAIN: RD3 - Transformation Pathways
Organisational keyword: Director Edenhofer
Organisational keyword: RD3 - Transformation Pathways
Research topic keyword: Carbon Pricing
Research topic keyword: Inequality and Equity
Research topic keyword: Climate Policy
OATYPE: Hybrid Open Access
 Degree: -

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Title: Journal of Environmental Economics and Management
Source Genre: Journal, SCI, Scopus
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Publ. Info: -
Pages: - Volume / Issue: 116 Sequence Number: 102730 Start / End Page: - Identifier: CoNE: https://publications.pik-potsdam.de/cone/journals/resource/journal-of-environmental-economics-and-management
Publisher: Elsevier