CLI-MA-X

• Principal Investigator: Omar Rachedi
• Funding body: Fundación Ramón Areces
• Duration: 36 months

Carbon emissions continue to pose a significant threat to the environment, with the latest data indicating an alarming increase in global emissions, which are projected to result by 2026 in a temperature rise of more than 1.5 degrees Celsius above pre-industrial levels, surpassing the target set in the Paris Agreement. One proposed solution to combat carbon emissions is the implementation of carbon taxes. While these taxes would incentivize individuals to reduce their carbon footprint, the debate surrounding this policy tool is complex and multifaceted, as carbon taxes tend to be regressive, meaning they place a proportionally greater burden on low-income individuals and households.  As a result, an increase in carbon taxes affects disproportionately more wealth-poor individuals. This raises concerns about the potential socioeconomic disparities that may arise because of implementing such taxes.

My research project addresses three key questions related to carbon taxation:

1. How to set an optimal carbon tax taking into account its regressive effects on wealthpoor individuals?
2. How to do so in a way that can reduce political backlash and grant a majority support? 
3. How to do so in a way that can also spur energy efficiency innovation?

To do so, I will develop models with heterogeneous agents which allow to quantify how the reduction in emissions associated to a given carbon tax depends on the amount of household inequality and the level of progressivity of the entire tax system. I aim to study how to set carbon taxes to get to desired level of reduction in carbon emissions, while minimizing their negative effects of aggregate output. In particular, I will study to what extent the introduction of carbon taxes requires adjustments to the overall tax system, and especially to its degree of progressivity. Overall, the objectives of the projects are to develop state-of-the art frameworks that will allow academic researchers and policymakers to better understand the impact of environmental policies both at the aggregate level as well as across households that differ in their income and wealth. In this way, this project will characterize how environmental policies such as carbon taxes should be adjusted to the amount of household inequality to best achieve their goals in curbing emissions and spur energy efficiency innovation.