Individual and Firm Taxation in a CO₂ Emitting Economy

Lambertini, L. & Wrzaczek, S. (2025). Individual and Firm Taxation in a CO₂ Emitting Economy. Environmental and Resource Economics 10.1007/s10640-024-00952-0. (In Press)

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Abstract

Typical problems of negative effects of CO₂
emissions are that (i) they are suffered and generated not by the same agent and that (ii) individuals consider them as too small to influence the aggregated effect. Additionally, only little is known about how the behavior depends on the age-composition of a population and individual age-dependent life-cycle effects. We address these issues by an overlapping generations (OLG) structured population and a firm sector producing a homogeneous final consumption good. While firms generate CO₂
emission during the production process, individuals suffer from the aggregated effect. We analyze the difference between the decentralized market and the social welfare solution and study to which extent social optimality can be attained with different taxes on individual consumption and/or production. We find that firm taxation is always sufficient to reach the socially optimal level of CO₂
emissions. A social optimal distribution of consumption across cohorts, however, can only be attained by firm taxes in the steady state. In the general case, i.e., along a dynamic transitional path, additionally age-specific individual taxation is needed.

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