Optimal Carbon Taxation and Horizontal Equity: A Welfare-Theoretic Approach with Application to German Household Data

53 Pages Posted: 16 Mar 2021

See all articles by Martin C. Hänsel

Martin C. Hänsel

Potsdam-Institut für Klimafolgenforschung (PIK)

Max Franks

Potsdam-Institut für Klimafolgenforschung (PIK)

Matthias Kalkuhl

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

Ottmar Edenhofer

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

Date Written: 2021

Abstract

We develop a model of optimal carbon taxation and redistribution taking into account horizontal equity concerns by considering heterogeneous energy efficiencies. By deriving first- and secondbest rules for policy instruments including carbon taxes, transfers and energy subsidies, we then investigate analytically how horizontal equity is considered in the social welfare maximizing tax structure. We calibrate the model to German household data and a 30 percent emission reduction goal. Our results show that energy-intensive households should receive more redistributive resources than energy-efficient households if and only if social inequality aversion is sufficiently high. We further find that redistribution of carbon tax revenue via household-specific transfers is the first-best policy. Equal per-capita transfers do not suffer from informational problems, but increase mitigation costs by around 15 percent compared to the first-best for unity inequality aversion. Adding renewable energy subsidies or non-linear energy subsidies, reduces mitigation costs further without relying on observability of households’ energy efficiency

JEL Classification: H210, H230, Q520, Q540

Suggested Citation

Hänsel, Martin C. and Franks, Max and Kalkuhl, Matthias and Edenhofer, Ottmar, Optimal Carbon Taxation and Horizontal Equity: A Welfare-Theoretic Approach with Application to German Household Data (2021). CESifo Working Paper No. 8931, Available at SSRN: https://ssrn.com/abstract=3804535 or http://dx.doi.org/10.2139/ssrn.3804535

Martin C. Hänsel (Contact Author)

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Max Franks

Potsdam-Institut für Klimafolgenforschung (PIK) ( email )

Telegrafenberg 31
Potsdam, Brandenburg 14473
Germany

Matthias Kalkuhl

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

Torgauer Straße 12-15
Berlin, 10829
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

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