Just Transition, Redistribution, and Asset Returns

Abstract

We study the just transition in a general equilibrium asset-pricing model that combines fiscal policy and redistribution with heterogeneous investors, labor-income exposure, portfolio restrictions, and green asset preferences. Workers earn labor income primarily from brown activities and can invest only in a market index, while capital owners earn no labor income but trade green and brown equity directly. We show that fiscal instruments differ sharply in their effectiveness in supporting the transition, and in their fairness. Dividend taxation is the most effective instrument for lowering the relative cost of capital of green firms and redirecting capital toward them; in our framework, it captures much of the effect of a broad carbon tax while placing a much more limited direct burden on workers. Consumption and labor-income taxes instead have smaller effects on capital reallocation and expose workers to a larger share of transition costs. Redistribution also points to a more nuanced side of the fairness-effectiveness tradeoff as rebating more revenues to workers insures them against transition costs, but attenuates incentives to reallocate capital. Portfolios play an important underlying role: workers cannot directly hedge their brown labor-income risk or fully participate in the financial gains from the transition, which in turn affects equilibrium premia. Lastly, fiscal policy and sustainable finance can reinforce one another, as green asset preferences may amplify the effect of taxation. Together, our findings have important implications for designing a green transition that is both effective and just, and highlight the importance of developing greener jobs in the longer run.

Keywords: Green Transition, Just/Fair Transition, Asset Pricing, Heterogeneous Investors, Labor Income, Tax Policy, Redistribution, Sustainable Finance. JEL Codes: G11, Index Investing

JEL Classification: G11, G12, G18, H23, Q58