Taxing carbon under market incompleteness
Title: Taxing carbon under market incompleteness
Series/Number: IGIER Working Paper; 2014/513
External link: ftp://ftp.igier.unibocconi.it/wp/2014/513.pdf
This paper is the first attempt, to the best of our knowledge, to study the impact of a carbon tax by means of a heterogeneous agents DSGE model. The objectives of the paper are two: i) To assess how the results of a representative agent model compare to those coming from a model accounting for heterogeneity across agents when evaluating aggregate economic and environmental impacts of a carbon tax; ii) To assess the distributional implications of a carbon tax and how they can be mitigated through different recycling schemes. We find that heterogeneous agents models deliver different results from those based on the representative firm paradigm, the main tool used to guide policy making so far. In particular, we find evidence of a relatively sizable double dividend for several recycling schemes and carbon taxes as high as 50% of the energy price. In addition, we find the potential for redistributive channels related to carbon policies that can only be appreciated applying this type of modeling framework.
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