Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/338407 
Year of Publication: 
2026
Series/Report no.: 
CESifo Working Paper No. 12443
Publisher: 
Munich Society for the Promotion of Economic Research - CESifo GmbH, Munich
Abstract: 
We characterize optimal climate policy in an economy with heterogeneous households and non-homothetic preferences. We focus on constrained efficiency, where the planner is restricted from transferring resources across households. We derive three results. First, the constrained-optimal carbon tax is heterogeneous and progressive. Second, if restricted to a uniform tax, the optimal rate is lower than the standard Pigouvian level due to inequality. Third, this allocation is decentralizable using only uniform instruments - a carbon tax, clean subsidy, and a lumpsum transfer. In a quantitative application, we show this policy generates a Pareto improvement, reconciling climate efficiency with inequality concerns.
Subjects: 
carbon tax
inequality
consumption
welfare
climate change
JEL: 
E21
H21
H23
Q54
Document Type: 
Working Paper
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