This paper addresses the design of Pigouvian taxes aimed at the climate externality in conjunction with other tax and transfer instruments. The analysis is split into two steps:

First, the design of commodity-level carbon taxes, and second, the optimal recycling of the associated revenue. I show that the optimal pure carbon taxes differ from the benchmark of a Pigouvian tax, i.e., the marginal environmental damage. They are differentiated between commodities based on their carbon intensity, the behavioral effectiveness, and distributional concerns, i.e., the more emissions-intensive, elastic, and redistributionally unvaluable a good is, the higher the carbon tax on it. However, this policy is suboptimal if the planner has vertically redistributive preferences, and additional tax and transfer policies can increase welfare. If the tax system is sufficiently unrestricted, the Pigouvian benchmark is recovered through the interaction of the standard tax instruments with carbon prices.

I study how the speed of carbon-tax phase-in interacts with revenue recycling. Front-loaded taxes cut cumulative emissions earlier and meet climate targets with a lower peak tax, limiting future wage and GDP losses. But rapid implementation can raise short-run resistance: with household adjustment frictions, especially among low-income households, green technology adoption is delayed, so households face higher energy costs during transition. I quantify this trade-off in a heterogeneous-agent GE model with costly household electrification under financing frictions. I compute welfare by income and age across different recycling schemes in quantitative policy experiments and isolate the role of adjustment frictions. Rapid phase-in worsens short-run welfare, particularly for low-income households, because taxes rise before electricity-sector productivity gains materialize, causing deeper temporary wage declines. Over the long run, faster phase-in improves decarbonization, GDP, and aggregate welfare. Recycling matters: lump-sum transfers protect constrained households better than subsidies, without hindering future growth if introduced quickly.

Pricing greenhouse gas emissions is a key Pigouvian policy tool but can have significant distributional consequences. To address these concerns, we examine household-level greenhouse gas emission inequality across the EU. We develop an improved cross-sectional dataset of household carbon footprints for 27 EU countries by merging EXIOBASE, a multi-regional environmentally extended supply-use dataset, with the European Household Budget Survey.

We find substantial emission inequality both between and within countries, with most variation occurring within countries. Net income weakly predicts household carbon footprints. A decomposition shows that household emissions reflect the consumption–income relationship, consumption basket composition, and differences in emission intensities across items. To interpret these patterns and assess policy implications, we develop a life-cycle model with a non-homothetic CES aggregator that replicates the empirical relationship between income, consumption, and emissions. Calibrated to 26 EU countries, the model provides a framework to analyse the distributional and welfare effects of carbon pricing.