Christian Pröbsting, KU Leuven (Department Seminar)

“The Aggregate and Distributional Effects of a Carbon Tax”

Abstract

Which firms and households will be most impacted by a carbon tax? To answer that question I set up a heterogenous agent, multi-sector model with putty-clay technology. A tax of $100 per ton of carbon emissions cuts emissions by 25% after 5 years, but it also reduces output by 2% in the short run and 5% in the long run. In the short term, the tax is progressive despite poorer households spending more on carbon-intensive goods, the prices of which are rising. The putty-clay model’s inherent complementarity of capital and energy causes a sharp decline in capital income, a major source of income for top earners, and the resulting decline in investment causes job cuts in the capital goods-producing industries that employ high-income earners. In the longer run, as factor prices and capital stocks adjust, the tax incidence flattens with middle class households loosing 2% of their real income, somewhat less than low-income and high-income households.

Contact person: Jeppe Druedahl