Abstract
We set up a model with intergenerational bequest transfers and climate damage on the wealth of heterogeneous households. We show that, under credit market imperfections and depending on wealth distribution across households, a balanced budget climate policy may widen the wealth inequality gap between the rich and poor. Climate policy may create positive effects on the wealth of households, but these effects are asymmetric across households in terms of both magnitude and the transmission of gains from a climate policy within households. The gains of the poor from a climate policy are mainly transmitted into improving living standards and the investment in human capital due to the higher marginal return to education investment. By contrast, the gains of the rich from a climate policy are transmitted biasedly into physical capital accumulation and thereby enhance their monopolistic position in the production of intermediate inputs. We show that, for any climate policy, there exists a corresponding threshold of aggregate physical capital. When the aggregate physical capital of the economy exceeds this threshold, the corresponding climate policy may widen the intergenerational bequest transfers among heterogeneous households, thereby contributing to widening the wealth inequality gap between the rich and poor.
Highlights
Two issues emerging in the twenty-rst century are climate change and income/wealth inequality
This paper aims to contribute a theoretical model linking climate policy and wealth inequality to identify the conditions under which climate policy may widen the wealth inequality gap between the rich and poor
This is because in the model set-up that focuses on the persistent eect of intergenerational bequest transfers on wealth distribution, the bequest transfer that a household receives from its parent household is the source/determinant of its wealth
Summary
Two issues emerging in the twenty-rst century are climate change and income/wealth inequality. The Paris Agreement under the United Nations Framework Convention on Climate Change, which aims to limit global warming to well below 2 °C above pre-industrialization levels, requires strict transitions to clean economies. These transitions can be implemented through a carbon
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