Abstract
We examine the lifetime incidence and intergenerational distributional effects of an economy wide carbon tax swap using a numerical dynamic general equilibrium model with overlapping generations of the U.S. economy. We highlight various fundamental choices in policy design including (1) the level of the initial carbon tax, (2) the growth rate of the carbon tax trajectory of over time, and (3) alternative ways for revenue recycling. Without revenue recycling, we find that generations born before the tax is introduced experience smaller welfare losses, or even gain, relative to future generations. For suffciently low growth rates of the tax trajectory, the impacts for distant future generations decrease over time. For future generations born after the introduction of the tax, the negative welfare impacts are the smallest (largest) when revenues are recycled through lowering pre-existing capital income taxes (through per-capita lump-sum rebates). For generations born before the tax is introduced, we find that lump-sum rebates favor very old generations and labor (capital) income tax recycling favors very young generations (generations of intermediate age).
Highlights
The public acceptance for climate mitigation policies depends crucially on how the economic costs of achieving carbon dioxide (CO2) emissions reductions are distributed among heterogeneous socio-economic groups
Focusing on the impact of the carbon tax itself, i.e., without considering revenue recycling, we find, firstly, that current generations born before the tax is introduced experience smaller welfare losses, or even gains, as compared to future generations born after the introduction of the tax
We focus in our analysis on the following aspects of designing a carbon tax swap for the U.S economy18: (i) the initial level of the carbon tax rate, considering $25 or $50 per ton of CO2, 16Given our computational strategy for terminal approximation, we have verified that T 1⁄4 150 is sufficient to achieve convergence towards a new steady-state equilibrium after policy shocks have been implemented. 17Households in our model live from age 20 to 70
Summary
The public acceptance for climate mitigation policies depends crucially on how the economic costs of achieving carbon dioxide (CO2) emissions reductions are distributed among heterogeneous socio-economic groups. We are interested in understanding how the intergenerational incidence is affected by fundamental choices in policy design including (1) the initial level of the carbon tax rate, (2) the growth rate of the carbon tax trajectory of over time, and (3) alternative ways of recycling the revenue back to the economy (lump-sum rebates or cuts in either capital or labor income taxes). Layering on top of a carbon tax policy the distributional impacts from alternative ways for revenue recycling, we find that for future generations born after the introduction of the tax, the negative welfare impacts are the smallest (largest) when revenues are recycled through lowering pre-existing capital income taxes (through percapita lump-sum rebates); the welfare impacts under labor tax recycling fall in between these two cases.
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