Implicit carbon prices

Abstract

Climate and fiscal policy interact closely. The former imposes explicit prices for carbon emissions, while the latter affects emissions implicitly. We study the correspondence between explicit and implicit carbon pricing of a Ramsey-optimal fiscal policy in a neoclassical growth model of climate change. Our central result is that any arbitrary sequence of explicit carbon prices can be achieved implicitly through a blend of conventional taxes (e.g., consumption, energy, and income taxes), when lump-sum transfers are available. In a Ramsey setting, policy balances these taxes’ traditional revenue-raising role with the Pigouvian role of fixing the climate externality. We characterize the Ramsey and Pigouvian components of optimal tax rates. We show that explicit carbon pricing is implicitly implementable through a mix of conventional taxes also in this framework. We extend these findings to scenarios compatible with net-zero emissions, adding carbon capture technologies and a cap on cumulative emissions.