Carbon Tax with Individuals’ Heterogeneous Environmental Concerns

Abstract This study analyzes the effects of carbon taxation and environmental awareness on wage inequality and economic growth. The findings reveal that a stricter carbon tax positively correlates with wage inequality and growth. When R&D firms lack complete control over the magnitude of innovation leaps, a tighter carbon tax exacerbates wage inequality while fostering income growth and green innovation. When firms fully determine their innovation leap, a stricter carbon tax reduces wage inequality and slows GDP growth. Changes in the population’s environmental awareness generate different results. When R&D firms lack complete control over innovation leaps, greater ecological awareness increases wage inequality and GDP growth, but only if green products command a higher markup. When firms fully determine innovation leaps, rising ecological awareness induces a U-shaped effect on the skill premium and an inverted U-shaped effect on the share of unskilled workers, while consistently supporting per capita GDP growth.