Household Heterogeneity, Aggregation, and the Distributional Impacts of Environmental Taxes

CER-ETH, Center of Economic Research at ETH Zurich, Working Paper No. 16/230

44 Pages Posted: 13 Jan 2016

See all articles by Sebastian Rausch

Sebastian Rausch

ZEW – Leibniz Centre for European Economic Research; Heidelberg University - Alfred Weber Institute for Economics; ETH Zürich - Centre for Energy Policy and Economics (CEPE); Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change

Schwarz Giacomo

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Date Written: January 13, 2016

Abstract

This paper examines how the general equilibrium incidence of an environmental tax depends on the effect of different incomes and preferences of heterogeneous households on aggregate outcomes. We develop a Harberger-type model with general forms of preferences and substitution between capital, labor, and pollution in production that captures the impact of household heterogeneity and interactions with production characteristics on the general equilibrium. We theoretically show that failing to incorporate household heterogeneity can qualitatively affect incidence. We quantitatively illustrate that this aggregation bias can be important for assessing the incidence of a carbon tax, mainly by affecting the returns to factors of production. Our findings are robust to a number of extensions including alternative revenue recycling schemes, preexisting taxes, non-separable utility in pollution, labor-leisure choice, and multiple commodities.

Keywords: Environmental tax incidence, Heterogeneous households, General equilibrium, Aggregation bias, Distributional impacts

JEL Classification: H23, Q52

Suggested Citation

Rausch, Sebastian and Giacomo, Schwarz, Household Heterogeneity, Aggregation, and the Distributional Impacts of Environmental Taxes (January 13, 2016). CER-ETH, Center of Economic Research at ETH Zurich, Working Paper No. 16/230, Available at SSRN: https://ssrn.com/abstract=2714879 or http://dx.doi.org/10.2139/ssrn.2714879

Sebastian Rausch (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

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Heidelberg University - Alfred Weber Institute for Economics ( email )

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ETH Zürich - Centre for Energy Policy and Economics (CEPE) ( email )

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Massachusetts Institute of Technology (MIT) - Joint Program on the Science and Policy of Global Change ( email )

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United States

Schwarz Giacomo

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

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