The Environmental Tax: Effects on Inequality and Growth

Within an R&D-driven growth model, this paper studies how an environmental tax and its cost both for firms and consumers affect individuals’ incentives for human capital accumulation, income inequality, and the per capita growth rate. The results show that when a low share of the environmental tax on consumption is levied, a tighter environmental tax results in an increase in individuals’ human capital accumulation and income inequality between both unskilled and skilled workers and among skilled workers and spurs the per capita growth rate. A numerical simulation for the U.S. economy illustrates the results and shows that the increase in income inequality is very modest compared to the large increase in the per capita output growth rate. Moreover, it can be seen that a no-carbon-pricing green policy with command and control instruments, for example, has a negative effect on both the incentive for human capital accumulation and the per capita growth rate.