Manor Road Seminar Room B
Abstract: Efficient policies price externalities through Pigouvian taxes, but these must be adjusted when there are other distortionary taxes in the economy. I develop a two-period overlapping generations climate-economy model to study integrated capital, labor, and carbon taxes. I derive five primary results. First, the optimal carbon tax in an economy with distortionary fiscal policy equals the market costs of carbon, but not always attains its Pigouvian level. Second, under weak separability in preferences over consumption and leisure, age-dependent labor income taxes allows the optimal carbon tax to achieve its first-best. Third, even if age-dependent taxes are available, non-separability in preferences and a decreasing labor supply over the life cycle leads to positive capital income taxes and an optimal price on carbon emissions that falls short of the Pigouvian tax. Fourth, an exogenous capital income tax rate implies an optimal carbon price that differs from both the market costs of carbon and its Pigouvian level. Fifth, the existence of an exogenous carbon price provides a firm rationale for positive taxes on capital.
Biography: Richard is a Ph.D candidate in the Department of Economics at Tilburg University. He is currently visiting the University of Oxford. His research interests are in Macroeconomics and Environmental Economics.