Abstract

How to adapt social security and fiscal instruments to smooth the cost of the ecological and demographic transition between generations? Following Gertler (1999), we develop and calibrate an analytic climate-economy model in which individuals exhibit life cycle behavior and which allows to introduce demographic trends. Generations are overlapped with realistic average lengths of life, work, and retirement. Energy use creates emissions, which accumulate in the atmosphere and are harmful to production. The government faces multiple tasks at once: mitigating the pollution externality, providing redistribution between generations, and financing an exogenous spending. We analyze the consequences of an environmental tax reform on inter-generational inequalities. We specifically investigate how the tax system should adapt, taking into account not only labor and capital taxes versus lump-sum transfers, but also social security in the face of demographic change. The model remains tractable, allowing us to study comparative statics. Numerical simulations describe the transitional dynamic path.

Co-author : Alessandra Pizzo (Université Paris 8)

Practical information