Christian Pröbsting

(KU Leuven)

will give a presentation on

A putty-clay model to evaluate the aggregate and distributional effects of a carbon tax

Abstract: Which firms and households will be most impacted by a carbon tax? To answer that question, I set up a heterogenous agent, multi-sector model with putty-clay technology. A tax of $100 per ton of carbon emissions cuts emissions by 25% after 5 years, but it also reduces output by 1% in the short run and 1.75% in the long run. In the short term, the tax is slightly progressive despite poorer households spending more on carbon-intensive goods, the prices of which are rising. The putty-clay model’s inherent complementarity of capital and energy causes a sharp decline in capital income, a major source of income for top earners, and the resulting decline in investment causes job cuts in the capital goods-producing industries that employ high-income earners. In the longer run, as factor prices adjust, the tax becomes regressive and pre-tax real income in the lowest income percentile drops by 4%, 0.5 percentage points more than for the average household.