A0278
Title: Net zero: distributional effects and optimal share of subsidies and transfers
Authors: Alessandro Sardone - Halle Institute for Economic Research (Germany) [presenting]
Abstract: The distributional consequences of environmental policies in Germany are explored, as how heterogeneous households are affected by the transition to a net-zero emission economy, and how this can be modelled in a general equilibrium framework. The focus is on actions that public authority can take to compensate for welfare loss and to smooth the transition. Two policies are contemplated: direct transfers to poorer households to sustain their level of consumption; and subsidies to businesses to "go green." Both policies require the use of carbon tax revenues. The objective is to determine what is the most welfare-enhancing share of subsidies and transfers. A Two agents Environmental-DGE model is developed to quantify the impact of the net zero policy. The transition to an emission-free economy is simulated, in which non-energy firms fully abate emissions and the energy sector is mostly dominated by green producers. By increasing production costs for the dirty sector along the transition, resources shift from the dirty to the clean sector, which becomes bigger in relative terms in the new steady state. At the same time, distributional effects (price and income effects) are detected along the transition. Prior to redistribution, wealth-poor households see their consumption decline the most in relative terms. Welfare, labor and output dynamics strongly depend on how carbon tax revenues are redistributed among firms and households.
