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 with 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.
Douenne et al. (Wed,) studied this question.