Optimal Fiscal Policy in a Climate-Economy Model with Heterogeneous Households
Abstract
Abstract We study optimal fiscal policy to address climate change and inequality. We theoretically characterise optimal carbon and income taxes and quantify them for the US economy using a climate model calibrated to DICE. In contrast to the representative-agent setting, we find that (i) tax distortions have a negligible effect on the optimal carbon tax; (ii) inequality only slightly reduces it; (iii) the revenue from carbon taxes is optimally split about equally between reducing tax distortions and increasing transfers. Unlike the double-dividend policy, optimal carbon taxation has progressive welfare effects, and low-income households benefit even in the short run.
Fields of Study & Subjects
Climate Change Policy and Economics
Fiscal Policy and Economic Growth
Economic Policies and Impacts
Publication details
- Journal / source
- The Economic Journal
- Publisher
- Oxford University Press (OUP)
- Volume
- 136
- Issue
- 677
- Pages
- 1761–1801
- Publication date
- 14 January 2026
- Language
- EN