Financing the green transformation with a carbon-based wealth tax for climate protection: A proposal

Wealth distribution and climate risks are two great challenges of our time. This paper proposes a new type of tax to correct the disparity of wealth distribution and help to finance (and accelerate) the green transition. Our proposal is a Carbon-based Wealth Tax (CWT) that should be levied on carbon-based (brown) wealth rather than carbon-intensive goods as the usual carbon tax would suggest which is often shown to be regressive. While the CWT re-corrects wealth distribution it raises revenue that could be used to subsidize the creation of green assets - by changing dynamic portfolio decisions and triggering a reallocation of assets from brown to green ones. To demonstrate those effects stylized green and brown asset returns using US data are calibrated as low-frequency returns on US assets between 2010 and 2021. We find that such a tax and subsidy scheme as designed by a CWT may not adversely affect wealth evolution. The CWT is a feasible, effective, and fairer instrument for reducing carbon emissions, keeps wealth accumulation going, and supports a fair transition and control of sovereign debt dynamics.