Recycling Carbon Tax Revenue to Maximize Welfare

Stephie Fried, Kevin Novan and William Peterman

No 2021-023, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper explores how to recycle carbon tax revenue back to households to maximize welfare. Using a general equilibrium lifecycle model calibrated to reflect the heterogeneity in the U.S. economy, we find the optimal policy uses two thirds of carbon-tax revenue to reduce the distortionary tax on capital income while the remaining one third is used to increase the progressivity of the labor-income tax. The optimal policy attains higher welfare and more equality than the lump-sum rebate approach preferred by policymakers as well as the approach originally prescribed by economists -- which called exclusively for reductions in distortionary taxes.

Keywords: Carbon tax; Overlapping generations; Revenue recycling (search for similar items in EconPapers)
JEL-codes: E62 H21 H23 (search for similar items in EconPapers)
Pages: 30 p.
Date: 2021-04-02
New Economics Papers: this item is included in nep-dge, nep-ene, nep-env, nep-mac and nep-pub
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2021-23

DOI: 10.17016/FEDS.2021.023

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