2025/14 | LEM Working Paper Series | ||||||||||||||||
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Tackling emissions and inequality: policy insights from an agent-based model |
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Giacomo Ravaioli, Francesco Lamperti, Andrea Roventini and Tiago Domingos |
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Keywords | |||||||||||||||||
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climate policies, inequality, mitigation, just transition, ecological macroeconomics, agent-based modelling
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JEL Classifications | |||||||||||||||||
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D31, E61, H23, Q43, Q54
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Abstract | |||||||||||||||||
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Climate change and economic inequality are two critical and
interlinked global challenges. The feasibility of jointly reducing
greenhouse gas emissions and inequality has often been
questioned. Here, we aim to test whether a properly designed mix of
progressive and environmental fiscal policies can effectively reduce
both while improving economic dynamics. We extend the DSK
integrated-assessment agent-based model to combine an income
class-based analysis of inequality with an improved accounting of
emissions. We calibrate the model to the European Union and employ it
to explore how fiscal policies can tackle the coevolution of income
inequality and carbon emission. The results show that no single policy
in our portfolio can simultaneously reduce inequality and
emissions. Redistributing income increases aggregate consumption and
hence emissions, whereas environmental taxes risk hampering economic
growth and stability. In contrast, a combination of progressive fiscal
policies, green subsidies to reduce carbon intensity of production and
a mild carbon tax achieves both goals, while increasing employment,
growth, stability and the consumption of low-income households. A
potential trade-off emerges between increasing economic growth and
reducing emissions, mediated by the extent to which green innovations
lead to higher productivity. In conclusion, our results show that
moving towards a sustainable and inclusive economy needs the co-design
of distributive, innovation and mitigation policies.
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