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Understanding the Inequality and Welfare Impacts of Carbon Tax Policies

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  • Stephie Fried
  • Kevin Novan
  • William B. Peterman

Abstract

This study develops a general equilibrium life-cycle model to explore the welfare and inequality implications of different ways to return carbon tax revenue back to households. We find that the welfare-maximizing rebate uses two-thirds of carbon-tax revenue to reduce the distortionary tax on capital income while using the remaining one-third to increase the progressivity of the labor income tax. This recycling approach attains higher welfare and more equality than the lump-sum rebate approach preferred by policymakers as well as the approach originally prescribed by economists—which called exclusively for reductions in distortionary taxes.

Suggested Citation

  • Stephie Fried & Kevin Novan & William B. Peterman, 2024. "Understanding the Inequality and Welfare Impacts of Carbon Tax Policies," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 11(S1), pages 231-260.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/732842
    DOI: 10.1086/732842
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    References listed on IDEAS

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    1. Aubert, Diane & Chiroleu-Assouline, Mireille, 2019. "Environmental tax reform and income distribution with imperfect heterogeneous labour markets," European Economic Review, Elsevier, vol. 116(C), pages 60-82.
    2. Roberton C. Williams III & Hal Gordon & Dallas Burtraw & Jared C. Carbone & Richard D. Morgenstern, 2015. "The Initial Incidence of a Carbon Tax Across Income Groups," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(1), pages 195-214, March.
    3. Kevin A. Hassett & Aparna Mathur & Gilbert E. Metcalf, 2009. "The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 155-178.
    4. Roland Benabou, 2002. "Tax and Education Policy in a Heterogeneous-Agent Economy: What Levels of Redistribution Maximize Growth and Efficiency?," Econometrica, Econometric Society, vol. 70(2), pages 481-517, March.
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    More about this item

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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