Archiv Detail

Speaker:
Camille Hainnaux (University of Aix-Marseille)

Pollution versus Inequality: Tradeoffs for Fiscal Policy
^{(joint with Thomas Seegmuller)}

Abstract: In this paper, we investigate the impact of redistribution and taxation on inequality and pollution in a dynamic setting. For that, we build a two-sector Ramsey model with a green good and a polluting good. Households are heterogeneous, allowing for income inequality, and have non-homothetic preferences so that they must consume a positive amount of the polluting commodity. We find that playing on redistribution has no impact on pollution. Increasing the environmental tax under a high level of subsistence consumption leads to lower inequalities when coupled with high redistribution, but increases pollution. Therefore, there exists a tradeoff between inequality reduction and pollution mitigation. Looking at the stability properties of the economy, we find that the level of subsistence consumption and the externality matter. A high subsistence level of polluting consumption leads to unstability or indeterminacy of the steady-state, while the environmental externality plays a stabilising role in the economy. This leaves room for taxation and redistribution: increasing the tax rate and redistributing more towards the worker increase the threshold above which the steady-state becomes unstable, but also play a key role in the occurrence of indeterminacy when accounting for the externality. Hence, policymakers must take into account both subsistence consumption and the importance of the externality when it comes to the efficiency and stabilizing role of environmental fiscal reforms.

Website