Conference Agenda

With the expansion in both the level and scope of carbon pricing in Europe and elsewhere, the use of carbon price revenues has become a central question in climate policy design. This paper examines a fundamental trade-off: whether to recycle revenues to reduce distortionary labor taxes—generating a static efficiency gain—or to subsidize R&D for clean technologies to lower future decarbonization costs. We first develop a general-equilibrium model with distortionary taxation and endogenous directed technical change, showing that recycling revenues into clean R&D can, in principle, generate a dynamic fiscal dividend by expanding the future tax base. We then quantify these mechanisms using a calibrated extension of the model featuring heterogeneous households and a detailled representation of energy technologies. The numerical results show that recycling revenues through labour-tax reductions delivers robust aggregate welfare gains. In contrast, channeling revenues into electricity-sector R&D improves technologies but yields lower aggregate welfare than simple lump-sum transfers. This arises from induced sectoral misallocations when subsidies are not precisely targeted toward the underlying knowledge externalities.