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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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