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We investigate how irreversibility in "dirty" and "clean" capital stocks affects optimal climate policy, from both theoretical and numerical perspectives. An increasing carbon tax will reduce investments in assets that pollute, and so reduce emissions in the short term: our "irreversibility effect". As such the "Green Paradox" has a converse if we focus on demand side capital stock effects. We also show that the optimal subsidy increases with the deployment rate: our "acceleration effect". Considering second-best settings, we show that, although carbon taxes achieve stringent targets more efficiently, in fact renewable subsidies deliver higher welfare when policy is more mild.

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This paper investigates the consequences of environmental tax reforms for unemployment and welfare, in the case of developing countries with a large informal sector, rural-urban migration, and three different assumptions about public spending: (1) as part of a revenue-neutral policy, (2) fixed, and (3) varying endogenously. Under the indexation of unemployment benefits and informal-sector income that give rise to a double dividend, a lower level of public spending is associated with a smaller negative impact on the after-tax income of households and a higher increase in employment. These policies, however, still lead to a reduction in social welfare; even more so in the case of endogenous public spending, although it is associated with a higher increase in employment and a smaller reduction in private-sector incomes. The model implies that complementary policy, in terms of lower public spending, is unlikely to be socially acceptable, and does not support the case for a green tax reforms in developing countries.Keywords Informal sector · Matching frictions · Rural-urban migration · Pollution taxes · Double dividend A previous version of this paper was circulated under the title, Effects of carbon taxes in an economy with large informal sector and rural-urban migration. I thank

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