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.

Household net income is only a weak predictor of carbon footprints in the cross-section. We document this fact using a harmonized dataset linking environmentally extended supply-use tables to the European Household Budget Survey across 26 EU countries, in which emissions inequality is driven primarily by within-country variation. To recover the lifetime income-emissions relationship, we calibrate an overlapping-generations model with non-homothetic CES preferences, where households allocate consumption across five categories with distinct emissions intensities. Identification comes from the non-proportional consumption-income relationship, heterogeneity in consumption baskets, and variation in emissions intensities across goods. The calibrated model delivers the first quantification of the lifetime income-emissions relationship for EU households. Life-cycle consumption dynamics account for a substantial share of the attenuated cross-sectional gradient, implying that standard cross-sectional analyses significantly overstate the regressivity of carbon pricing.