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

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Abstract

This paper examines the non-environmental welfare effects of introducing a revenue- neutral carbon tax policy. Using a life cycle model, we find that the welfare effects of the policy differ substantially for agents who are alive when the policy is enacted compared to those who are born into the new steady state with the carbon tax in place. Consistent with previous studies, we demonstrate that, for those born in the new steady state, the welfare costs are always lower when the carbon tax revenue is used to reduce an existing distortionary tax as opposed to being returned in the form of lump-sum payments. In contrast, during the transition, we find that rebating the revenue with a lump sum transfer is less costly than using the revenue to reduce the distortionary labor tax. Additionally, we find that the tax policy is substantially more regressive over the transition than in the steady state, regardless of what is done with the revenue. Overall, our results demonstrate that estimates of the non-environmental welfare costs of carbon tax policies that are based solely on the long-run, steady state outcomes may ultimately paint too rosy of a picture. Thus, when designing climate policies, policymakers must pay careful attention to not only the long-run outcomes, but also the transitional welfare costs and regressivity of the policy.

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  • Stephie Fried & Kevin Novan & William B. Peterman, 2016. "The Distributional Effects of a Carbon Tax on Current and Future Generations," Finance and Economics Discussion Series 2016-038, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgfe:2016-38
    DOI: 10.17016/FEDS.2016.038
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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. Freyre, Alisa & Klinke, Sandra & Patel, Martin K., 2020. "Carbon tax and energy programs for buildings: Rivals or allies?," Energy Policy, Elsevier, vol. 139(C).
    3. Yongyang Cai, 2020. "The Role of Uncertainty in Controlling Climate Change," Papers 2003.01615, arXiv.org, revised Oct 2020.
    4. Stephie Fried & David Lagakos, 2020. "Electricity and Firm Productivity: A General-Equilibrium Approach," NBER Working Papers 27081, National Bureau of Economic Research, Inc.
    5. 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.
    6. 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).
    7. 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.
    8. Stephie Fried & Kevin Novan & William Peterman, 2019. "The Macro Effects of Anticipating Climate Policy," 2019 Meeting Papers 683, Society for Economic Dynamics.

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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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