5b. Carbon taxes hurt employment – hurts productivity
Pedersen 6/6 [Lasse Heje Pedersen is a Stanford PhD, and a finance professor at Copenhagen Business School, as well as a principal at AQR. He have served as Director of the American Finance Association, in the Liquidity Working Group meeting at the Federal Reserve Bank of New York to address liquidity issues, on the Economic Advisory Boards of NASDAQ and FTSE, and on several editorial boards, including the Journal of Finance and Quarterly Journal of Economics. His academic awards include the Bernácer Prize to the best E.U. economist under 40 years of age, the Banque de France-TSE Prize, the Stephen A. Ross Prize, Fama-DFA Prizes, the Michael Brennan Award, the Brattle Prize, and Graham and Dodd Top Awards, 6/6/23, ‘Carbon Pricing versus Green Finance’, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4382360, SSRN]
Looking at the effect on output and employment is also interesting, especially if some people do not accept the welfare calculation based on the social cost of carbon. To analyze these effects, consider first the effect of an increasing the carbon price on employment using
where the derivation is in the proof of Proposition 5 below. Naturally, a higher carbon price lowers employment. This lower employment is driven by a lower carbon intensity, which lowers productivity ( ∂ log Ai ∂ log ˉpi < 0) and also lowers investment and thus capital ( ∂ log Ki ∂ log ˉpi < 0). Interestingly, these effects are smaller for more sustainable firms with lower si as seen from (22). Similarly, output is also decreasing in the carbon price: