The Social Cost of Carbon and Inequality: When Local Redistribution Shapes Global Carbon Prices

49 Pages Posted: 14 May 2019

See all articles by Ulrike Kornek

Ulrike Kornek

Potsdam Institute for Climate Impact Research (PIK)

David Klenert

Potsdam-Institut für Klimafolgenforschung (PIK)

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK); Mercator Research Institute on Global Commons and Climate Change (MCC); Technische Universität Berlin (TU Berlin)

Marc Fleurbaey

Princeton University - Woodrow Wilson School of Public and International Affairs

Date Written: 2019

Abstract

The social cost of carbon is the central economic measure for aggregate climate change damages and functions as a metric for optimal carbon prices. Previous literature shows that inequality significantly influences the level of the social cost of carbon, but mostly neglects a major source of inequality - heterogeneity in income below the national level. We characterize the relationship between climate and redistributional policy in an optimal taxation model that explicitly accounts for inequality between and within countries. In particular, we demonstrate that climate and distributional policy cannot be separated when national governments fail to compensate low-income households for climate change damages: Even if only one country does not compensate especially affected households, the social cost of carbon increases globally. Further, we use numerical methods to estimate the scope of these effects. Our results suggest that it is crucial to correct previous estimates of the social cost of carbon for national distributional policies.

Keywords: optimal taxation, inequality, climate change, social cost of carbon

JEL Classification: D300, D610, D630, H210, H230, Q540

Suggested Citation

Kornek, Ulrike and Klenert, David and Edenhofer, Ottmar and Fleurbaey, Marc, The Social Cost of Carbon and Inequality: When Local Redistribution Shapes Global Carbon Prices (2019). CESifo Working Paper No. 7628. Available at SSRN: https://ssrn.com/abstract=3387664

Ulrike Kornek (Contact Author)

Potsdam Institute for Climate Impact Research (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

David Klenert

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Ottmar Edenhofer

Potsdam Institute for Climate Impact Research (PIK) ( email )

P.O. Box 601203
14412 Potsdam, Brandenburg
Germany

Mercator Research Institute on Global Commons and Climate Change (MCC)

Torgauer Straße 12-15
Berlin, 10829
Germany

Technische Universität Berlin (TU Berlin)

Straße des 17
Juni 135
Berlin, 10623
Germany

Marc Fleurbaey

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

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