Authors: José Pedro Bastos Neves and Willi Semmler
Although economists widely advocate carbon pricing as an effective solution to reduce carbon emissions, this mechanism has had so far limited effects. The “carbon assets” tax would be levied on carbon-intensive (brown) wealth rather than carbon-intensive goods. We consider tax implementation issues such as tax base, incidence, and efficiency. Moreover, we analyze the impacts of such a tax scheme by setting up a model of asset pricing and dynamic portfolio decisions. Green and carbon-intensive returns used in the model are calibrated with low-frequency returns on stock prices between 2010 and 2021. We find that such a tax and subsidy scheme is a feasible and effective instrument in speeding up the transition to a greener economy, particularly in protracted periods of economic contraction. Our approach also brings a new perspective to wealth inequality discussions.
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