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Free keywords:
Optimal taxation, Inequality, Climate change, Social cost of carbon, Carbon tax
Abstract:
The social cost of carbon is a central metric for optimal carbon prices. Previous literatureshows that inequality significantly influences the social cost of carbon, but mostly omits het-erogeneity below the national level. We present an optimal taxation model of the social cost ofcarbon that accounts for inequality betweenand within countries. We find that climate anddistributional policy can generally not be separated. If only one country does not compen-sate low-income households for disproportionate damages, the social cost of carbon tendsto increase globally. Optimal carbon prices remain roughly unchanged if national redistribu-tion leaves inequality between households unaffected by climate change and if the utility ofhouseholds is approximately logarithmic in consumption.
