  In this paper, I consider a simple heterogeneous agents model of a production
economy with uncertain climate change and examine constrained efficient carbon
taxation. If there are frictionless, complete financial markets, the simple
model predicts a unique Pareto-optimal level of carbon taxes and abatement. In
the presence of financial frictions, however, the optimal level of abatement
cannot be defined without taking a stand on how abatement costs are distributed
among individuals. I propose a simple linear cost-sharing scheme that has
several desirable normative properties. I use calibrated examples of economies
with incomplete financial markets and/or limited market participation to
demonstrate that different schemes to share abatement costs can have large
effects on optimal abatement levels and that the presence of financial
frictions can increase optimal abatement by a factor of three relative to the
case of frictionless financial market.
