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Public Finance Options for Recycling Carbon Tax Revenue in Germany

Author

Listed:
  • Frederick van der Ploeg
  • Armon Rezai
  • Miguel Tovar Reanos

Abstract

We use a micro simulation model for Germany to show that it is optimal to use part of carbon tax revenue for handing out climate dividends, part to lower income taxes, and part to make up for public revenue shortfalls. The optimal recycling mix is tilted towards climate dividends away from tax reductions as relative inequality aversion increases. For baseline inequality aversion, up to half of carbon tax revenue is used to fund climate dividends and the rest to fund income tax cuts. We consider the implications of a Linear Expenditure System for carbon price policies.

Suggested Citation

  • Frederick van der Ploeg & Armon Rezai & Miguel Tovar Reanos, 2024. "Public Finance Options for Recycling Carbon Tax Revenue in Germany," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 80(1), pages 39-69.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2024-0004
    DOI: 10.1628/fa-2024-0004
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    More about this item

    Keywords

    carbon tax reform; efficiency; equity;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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