MACRO: Professor Sewon Hur (Yonsei University)

Unequal Climate Policy in an Unequal World

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 can be decentralized using only uniform instruments—a carbon tax, clean subsidy, and a lump-sum transfer. In a quantitative application, we show this policy generates a Pareto improvement, reconciling climate efficiency with inequality concerns.