Optimal Climate Policy with Incomplete Markets
Abstract:
This paper examines dy namic, optimal climate policy in a fiscal climate-economy model with incomp lete markets. Initially, in a simple two-period model, we isolate several m echanisms through which inequality, risk, and borrowing constraints affect optimal climate policy. We then introduce a new fiscal climate-economy fram ework with incomplete markets, which we calibrate to reflect critical aspec ts of the U.S. economy, particularly household inequality and risk, carbon emissions, and abatement technologies. Within this framework, we solve a Ra msey problem for a government that has access to multiple instruments, incl uding carbon taxes and government debt. In all scenarios, optimal carbon ta xes grow at a faster rate than GDP until the economy reaches carbon neutral ity. Moreover, we show that granting the planner the flexibility to determi ne the timing of debt and lump-sum transfers significantly affects redistri bution, insurance, aggregate variables, and welfare. Yet, surprisingly, thi s flexibility has minimal influence on the optimal trajectory of climate po licy.
DTSTAMP:20260501T200012Z DTSTART:20250331T163000Z DTEND:20250331T180000Z SEQUENCE:0 TRANSP:OPAQUE END:VEVENT END:VCALENDAR