Tackling emissions and inequality: Policy insights from an agent-based model

Climate change and economic inequality are two critical and interlinked global challenges. The feasibility of jointly reducing greenhouse gas emissions and inequality has often been questioned. Here, we aim to test whether a properly designed mix of progressive and environmental fiscal policies can effectively reduce both while improving economic dynamics. We extend the DSK integrated-assessment agent-based model to combine an income class-based analysis of inequality with an improved accounting of emissions. We calibrate the model to the European Union and employ it to explore how fiscal policies can tackle the coevolution of income inequality and carbon emission. The results show that no single policy in our portfolio can simultaneously reduce inequality and emissions. Redistributing income increases aggregate consumption and hence emissions, whereas environmental taxes risk hampering economic growth and stability. In contrast, a combination of progressive fiscal policies, green subsidies to reduce carbon intensity of production and a mild carbon tax achieves both goals, while increasing employment, growth, stability and the consumption of low-income households. A potential trade-off emerges between increasing economic growth and reducing emissions, mediated by the extent to which green innovations lead to higher productivity. In conclusion, our results show that moving towards a sustainable and inclusive economy needs the co-design of distributive, innovation and mitigation policies.