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

Abstract

This paper examines the non-environmental welfare effects of introducing a revenueneutral 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.

Climate policy in an unequal world: Assessing the cost of risk on vulnerable households

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The Role of Uncertainty and Risk in Climate Change Economics

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Climate Policy Transition Risk and the Macroeconomy

“…To evaluate the macroeconomic impacts of adopting a carbon price, the existing literature implicitly assumes that we begin in a state of the world where there is no anticipation of a potential future policy. This assumption is imposed in work studying the impacts of optimal carbon taxes (e.g., Nordhaus (2008), Acemoglu et al (2012), Golosov et al (2014, Barrage (2019)), studies comparing the efficiency and distributional impacts of alternative uses of carbon tax revenues (e.g., Bovenberg and Goulder (1996), Carbone et al (2013), Williams et al (2015), Fried et al (2018)), as well as studies comparing alternative policy tools -e.g., renewable energy policies, emissions standards (Goulder et al (1999), Goulder et al (2016)). However, given that forward-looking agents make investments with an understanding that a future climate policy is a real possibility, these previous analyses will misrepresent the true effects of introducing a carbon tax.…”