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

Stephie Fried, Kevin Novan () and William Peterman ()

No 2016-038, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: Carbon taxation; overlapping generations (search for similar items in EconPapers)
JEL-codes: E62 H21 H23 (search for similar items in EconPapers)
Date: 2016-04-20
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-mac, nep-pbe, nep-pke, nep-pub and nep-reg
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http://www.federalreserve.gov/econresdata/feds/2016/files/2016038pap.pdf (application/pdf)

Related works:
Journal Article: The Distributional Effects of a Carbon Tax on Current and Future Generations (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-38

DOI: 10.17016/FEDS.2016.038

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