The impact of climate policy on inequality in the presence of sector heterogeneity in labor productivity

This thesis examines the distributional consequences of climate policy in a general equilibrium model with heterogeneous workers and sectoral labor reallocation. In the existing literature, the inequality effects of climate policy are typically studied through two main channels: higher consumption costs driven by rising energy prices and lower non-labor income through changes in capital returns. Yet, these frameworks are generally not designed to capture heterogeneity in labor-income losses across workers. Empirically, workers employed in carbon-intensive (“dirty”) sectors tend to suffer larger earnings losses following displacement. As ambitious climate policy is likely to increase the prevalence of such adjustments, accounting for labor-market heterogeneity is essential for evaluating its distributional effects. I therefore develop a dynamic two-sector general equilibrium model in which households differ systematically in sector-specific productivity and choose employment across sectors according to their effective wages.