Conference Agenda

I study how household electrification shapes the distributional welfare effects of a carbon tax, focusing on the role of revenue recycling instruments. I develop a DSGE model with a discrete household electrification decision subject to financing frictions that slow adoption among low-income households, and non-homothetic preferences for energy. Using green subsidies as a revenue-recycling instrument lowers the peak tax rate required to achieve a given climate target, as it increases the share of renewable sources in electricity production and shifts energy demand towards electricity rather than fossil fuels. The lower tax rate and lower electricity price attenuate distortions in economic growth. However, as richer households electrify earlier, recycling carbon tax revenues through green subsidies disproportionately benefits higher-income households, leading to unequal welfare effects. Lump-sum transfers provide better insurance to financially constrained households but come at the cost of larger GDP and labor income losses. As an extension, I show that front-loaded carbon taxes reach climate targets with lower peak tax rates, limiting wage and GDP losses, but can amplify short-run inequality when combined with subsidy recycling.