Climate Macroeconomics: Aggregate Implications of Carbon Taxes

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.