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The Distributional Effects of a Carbon Tax on Current and Future Generations

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Listed:
  • Stephie Fried

    (Arizona State University)

  • Kevin Novan

    (University of California-Davis)

  • William Peterman

    (Board of Governors)

Abstract

This paper uses a life cycle model to compare how different approaches for recycling carbon tax revenue affect the welfare of agents born in the future steady state versus agents alive when the policy is adopted. Our results demonstrate that the welfare consequences of a given policy vary substantially across these two groups. For agents born into the future steady state, the expected non-environmental welfare costs are minimized when carbon tax revenue is used to reduce an existing distortionary tax. In contrast, among the agents alive when the policy is adopted, recycling revenue through uniform, lump-sum rebates results in the largest welfare increase across the policies we examine. Moreover, we find that the regressivity or progressivity of a policy also differs within the living population versus the future steady state population. Overall, our results illustrate that estimates of the non-environmental welfare costs of carbon tax policies that are based on the long-run outcomes miss-represent the near-term consequences. Given the potential importance of these near-term effects on the political feasibility of a policy, our findings indicate that, when designing a carbon tax, policy makers must pay careful attention to not only the long-run outcomes, but also to the transitional welfare effects of the policy. (Copyright: Elsevier)

Suggested Citation

  • Stephie Fried & Kevin Novan & William Peterman, 2018. "The Distributional Effects of a Carbon Tax on Current and Future Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 30-46, October.
  • Handle: RePEc:red:issued:16-217
    DOI: 10.1016/j.red.2018.02.001
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    Cited by:

    1. Laurence Kotlikoff & Felix Kubler & Andrey Polbin & Jeffrey Sachs & Simon Scheidegger, 2021. "Making Carbon Taxation A Generational Win Win," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(1), pages 3-46, February.
    2. Fu, Min & Gu, Liqin & Zhen, Zaili & Sun, Mei & Tian, Lixin, 2020. "Optimal carbon tax income distribution and health welfare spillover effect based on health factors," Applied Energy, Elsevier, vol. 276(C).
    3. Freyre, Alisa & Klinke, Sandra & Patel, Martin K., 2020. "Carbon tax and energy programs for buildings: Rivals or allies?," Energy Policy, Elsevier, vol. 139(C).
    4. Yongyang Cai, 2020. "The Role of Uncertainty in Controlling Climate Change," Papers 2003.01615, arXiv.org, revised Oct 2020.
    5. Stephie Fried & Kevin Novan & William B. Peterman, 2021. "Recycling Carbon Tax Revenue to Maximize Welfare," Finance and Economics Discussion Series 2021-023, Board of Governors of the Federal Reserve System (U.S.).
    6. Sebastian Rausch & Hidemichi Yonezawa, 2018. "The Intergenerational Incidence Of Green Tax Reform," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 9(01), pages 1-25, February.
    7. Stephie Fried & Kevin Novan & William B. Peterman, 2021. "The Macro Effects of Climate Policy Uncertainty," Finance and Economics Discussion Series 2021-018, Board of Governors of the Federal Reserve System (U.S.).
    8. Stephie Fried & Kevin Novan & William Peterman, 2019. "The Macro Effects of Anticipating Climate Policy," 2019 Meeting Papers 683, Society for Economic Dynamics.
    9. Stephie Fried & David Lagakos, 2020. "Electricity and Firm Productivity: A General-Equilibrium Approach," NBER Working Papers 27081, National Bureau of Economic Research, Inc.
    10. Malafry, Laurence & Soares Brinca, Pedro, 2020. "Climate Policy in an Unequal World: Assessing the Cost of Risk on Vulnerable Households," MPRA Paper 100201, University Library of Munich, Germany.

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    More about this item

    Keywords

    Carbon taxation; Overlapping generations;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • 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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