Tax-financed green policies and income inequality in an agent-based model

The interdependent dynamics among economic growth, income inequality, and greenhouse gas emissions have attracted attention in both academic and policy discussions on decarbonization strategies. Notwithstanding this expanding body of work, theoretical and empirical contributions underscore the difficulty of simultaneously achieving favorable outcomes across these three dimensions, suggesting the existence of a structural trilemma involving growth, income distribution, and environmental degradation. This paper develops an agent-based model (ABM) to explore these trade-offs and focuses on the impacts of different tax-financed green policies. Financing and environmental policy instruments produce complex effects on key macroeconomic variables, raising questions about whether—and under what conditions—the trilemma holds. The simulations examine scenarios in which either a carbon tax or a wealth tax finance the following green policies: (i) green price subsidy, (ii) public non-patented green R&D, (iii) subsidy for private green R&D, and (iv) green public procurement. While the carbon tax is both a financing and an environmental policy instrument, the wealth tax is primarily a mechanism of income redistribution. Findings suggest that the policy mix is a key determinant of whether the trilemma might occur. On the one hand, carbon taxation is more effective in reducing emissions but at higher social and macroeconomic costs. On the other hand, despite promoting redistribution, wealth taxation must count on specific complementary policies—such as public-led green innovation—to foster a low-carbon economy.