Mirrleesian carbon taxation

Working paper

Alleviating the economic damages from climate change is, to first order, a problem of efficiently limiting firms’ emissions. We analyze a neoclassical general-equilibrium model in which fossil-energy use generates climate damages. The model crucially incorporates substantial cross-firm heterogeneity in emission intensity that we document using a novel firm-level dataset spanning 151 countries. Firms choose energy and other inputs and self report emissions that are otherwise privately observed. Our central result is a simple formula for the optimal carbon tax that modifies marginal externality damages to account for firms’ incentives to distort reported emissions. Unlike standard carbon-tax proposals, the optimal tax varies markedly across firms as a function of emission intensities and exceeds common uniform-tax benchmarks, on average. Quantifying the model shows large welfare gains from internalizing reporting incentives: the constrained optimal tax recovers around 80% of the potential welfare benefits; a uniform tax that does not internalize reporting incentives, by contrast, recovers only around 20% of them.

Authors: Chiavari, A; Kohlhas, A

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Place of publication: Oxford, UK
• Publication date: 2026-08-01
• Paper number: 1120
• Language: English
• Keywords: climate change; Mirrleesian optimal taxes; optimal policy