The Distributional Dynamics
of Climate Policy


Gregor Boehl
University of Bonn
jointly with Flora Budianto
TU Berlin

Climate policy as distributional macroeconomics

  • Reducing carbon emissions is broadly accepted as necessary.
  • Climate policies affect prices, wages, profits, innovation etc.

⇒The green transition is not distribution-neutral.

Who pays today, who benefits tomorrow, and how does this shape political support?

Same target, different policy?

Target: 50% reduction in the brown-energy share

Carbon tax

Makes brown energy more expensive.

required tax 150%

Green subsidy

Makes green energy cheaper.

required subsidy 25%
⇒Model-based transition analysis.
⇒Core mechanism:
green R&D
Tax: industrial contraction
with fiscal revenue but moderate innovation
Subsidy: investment boom
with innovation boost but consumption squeeze

A distributional macro framework

  • New Keynesian short-run dynamics
    Sticky prices, output, inflation, interest rates, and consumption.
  • Heterogeneous households
    Wealth, income risk, taxes, wages, and dividends.
  • Brown and green energy sectors
    Firms substitute between fossil and renewable energy.
  • Endogenous green innovation
    Green-sector profits stimulate R&D and lower future green-energy costs.
  • Computational challenge
    Nonlinear transition dynamics with full household heterogeneity.
HANK + Energy + Innovation
π y

Transition dynamics

Transition dynamics figure

Distributional dynamics

Current-generation CEV figure Current and next generation CEV figure

Aggregate welfare

Utilitarian welfare figure Utilitarian and max-min welfare figure

Conclusion

  • Policy experiment: different policies, same target, different transition paths.
  • Today: most households prefer the carbon tax, especially poorer and middle-wealth households.
  • Green subsidy: high current financing needs and R&D crowding-out, but stronger long-run productivity gains.
  • Core trade-off: short-run political support versus long-run welfare.
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