Incentivizing Investors for a Greener Economy

Nam Nguyen, Alejandro Rivera, and Harold H. Zhang

♦ We demonstrate that investment income taxes incentivize capital allocation to the eco-friendly green sector away from the non-eco-friendly brown sector in a stylized economy. This tax reduces the arrival intensity of climate disasters, delivers the socially optimal allocation, and can be jointly implemented with the carbon tax, expanding policy-makers’ toolkit to reduce climate disasters. Extending the model with heterogeneous investors we show that investment income taxes can obtain support from a political majority and thereby relax political constraints faced by a carbon tax alone.

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