Carbon Emissions and Redistribution: The Design of Carbon Tax Rebates

Lea Fricke, Clemens Fuest and Dominik Sachs

No 12085, CESifo Working Paper Series from CESifo

Abstract: We study optimal redistribution and carbon taxation in a Mirrlees framework. Households differ in their carbon footprint due to both (i) the overall level of spending and (ii) the composition of spending. Introducing a cap on carbon emissions reduces the social value of output, which lowers the efficiency costs of taxation and thereby strengthens the scope for redistribution. However, the optimal increase in redistribution is weaker than suggested by popular proposals for a carbon dividend. While the optimal rebate schedule overcompensates low-income households and undercompensates high-income households for their carbon tax burden, the rebate nevertheless rises with income. Quantifying the model for Germany, we find that the optimal rebate for the 90th income percentile is nearly three times that for the 10th percentile, whereas carbon tax payments are about seven times higher. This results in higher effective average tax rates at the top and lower ones at the bottom of the income distribution.

Keywords: carbon tax; optimal taxation; carbon dividend (search for similar items in EconPapers)
JEL-codes: H21 H23 Q58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12085

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