Carbon Tax, Labour Market Segregation, and Inequality

A rapid transition to low-carbon production is essential for climate mitigation, but its economic costs and benefits are not evenly shared. This paper studies how carbon pricing affects workers of different skills when clean and dirty energy sectors differ in their skill intensity. We extend a dynamic multi-sector environmental growth model in the spirit of Golosov et al. (2014) by introducing high-and low-skill households and a production structure in which clean energy is relatively high-skill intensive and dirty energy relatively low-skill intensive. We show that a Pigouvian carbon tax decentralizes the first-best allocation by internalizing the external cost of emissions, yet it is not distributionally neutral: the induced reallocation of capital and labour toward clean production raises the skill premium and can reduce welfare for the low-skill household. Numerical simulations calibrated to the U.S. economy confirm that aggregate welfare gains coexist with significant welfare losses for low-skill households, raising concerns about the political acceptability of such policies.