Analyzing the Effects of Carbon Tax Policies on Inequality and Welfare

A new study has developed a general equilibrium lifecycle model to analyze the welfare and inequality implications of different methods of returning carbon tax revenue to households. The research suggests that the most beneficial rebate strategy involves using two-thirds of the revenue to reduce the distortionary tax on capital income, with the remaining third allocated to increasing the progressivity of the labor-income tax. This approach has been found to result in higher welfare and greater equality compared to the lump-sum rebate approach commonly favored by policymakers, as well as the approach originally proposed by economists, which only focused on reducing distortionary taxes.

The paper, authored by Stephie Fried, Kevin Novan from the University of California, Davis, and William B. Peterman from the Federal Reserve Board of Governors, sheds light on the importance of considering both welfare and inequality impacts when designing carbon tax policies. This research provides valuable insights for policymakers and economists working on addressing climate change and income inequality issues.

Stephie Fried, a senior economist at the Economic Research Department of the Federal Reserve Bank of San Francisco, led the study. Kevin Novan and William B. Peterman also contributed to this important research. Their findings offer a new perspective on the distributional effects of carbon tax policies and highlight the potential benefits of using a more balanced rebate approach.