Conference Agenda

Policies to mitigate climate change are high on the political agenda and their distributional effects are actively discussed. This paper makes two contributions to this discussion. First, it empirically identifies the spatial dimension between rural and urban households as important for the distributional effects of carbon taxes, as rural households in Germany have a carbon footprint 2.2 tons larger than comparable urban households, about 12 percent of the average carbon footprint. Second, I build a quantitative spatial general equilibrium model to evaluate different policies of rebating carbon tax revenues in terms of their redistributive effects and their political support along the transition to clean technologies. I find that rebating carbon tax revenues as lump-sum transfers redistributes on average 8,000 Euros from rural to urban households, and thus finds a political majority only in the urban region. In contrast, place-based transfers which are set to avoid any spatial redistribution do not reduce the speed of transitioning to clean technologies and find political majorities in both regions. Finally, carbon taxes have sizeable general equilibrium effects on housing prices, mitigating the heterogeneous impact of the tax across space by a quarter as they increase urban relative to rural rents. In addition, they increase prices of non-emitting houses by 5 percent, while decreasing those of carbon-emitting houses by the same amount.