Conference Agenda

This paper examines the distributional consequences of carbon pricing and alternative revenue-recycling schemes using an environmental dynamic stochastic general equilibrium model calibrated to the U.S. economy. The general equilibrium setting captures both income and consumption channels through which carbon pricing affects low- and high-income households. We compare several redistribution options, including transfers to low-income households, labor and consumption tax cuts, and government investment in the green sector. Results show that carbon pricing increases inequality in the absence of revenue recycling, even without heterogeneity in household emissions intensity of consumption or employment across sectors, challenging conventional explanations of inequality under carbon pricing. Transfers to low-income households most effectively reduce inequality, but at the cost of lower output. Labor tax cuts balance efficiency and equity, while policies supporting green companies tend to worsen inequality. The welfare-optimal policy depends on society’s inequality aversion: labor tax cuts dominate when efficiency is prioritized, whereas transfers are preferred when equity concerns are stronger.