Public Finance Options for Recycling Carbon Tax Revenue in Germany

Frederick (Rick) van der Ploeg, Armon Rezai and Miguel Tovar Reanos

FinanzArchiv: Public Finance Analysis, 2024, vol. 80, issue 1, 39-69

Abstract: We use a micro simulation model for Germany to show that it is optimal to use part of carbon tax revenue for handing out climate dividends, part to lower income taxes, and part to make up for public revenue shortfalls. The optimal recycling mix is tilted towards climate dividends away from tax reductions as relative inequality aversion increases. For baseline inequality aversion, up to half of carbon tax revenue is used to fund climate dividends and the rest to fund income tax cuts. We consider the implications of a Linear Expenditure System for carbon price policies.

Keywords: carbon tax reform; efficiency; equity (search for similar items in EconPapers)
JEL-codes: D12 D31 D62 D63 H23 J22 Q5 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1628/fa-2024-0004

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