Optimal Carbon Tax with Dynamic Skill Heterogeneity

Résumé :  Using a dynamic Mirrlees model similar to Golosov, Troshkin, and Tsyvinski (2016) with a polluting and non-polluting good, this paper extends the Jacobs and Mooij (2015) result on the irrelevance of tax distortions for the second-best Pigouvian tax to a dynamic framework with idiosyncratic labor shocks, finding that the optimal carbon tax is Pigouvian if the government can set optimal labor and capital taxes. Moreover, neither the formula for the optimal labor income tax nor the optimal capital income tax are directly affected by the presence of the externality. Hence, there is no « double dividend » and carbon taxation cannot be used to reduce distortions caused by income taxation or capital taxation. However, allowing for pollution damages to be a function of labor productivity modifies all tax formulas provided that the utility function is non-separable between pollution and consumption or labor supply, now involving the response of consumption and labor supply to pollution.