Gathering support for green tax reform

05  May 2022    3:00 pm CEST

Armon Rezai, Vienna University of Economics and Business

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This is an online event via Zoom. Please register using the registration link below.


The presentation is based on a paper co-authored with Frederick van der Ploeg and Miguel Tovar.

Green tax reform is unpopular because, typically, the poor are hurt most by the higher prices of carbon-intensive commodities. If revenues from a carbon tax are recycled, it may be feasible to gain popular support for green tax reform. To investigate this, we estimate an EASI demand system from German household data and a labour supply schedule, using wage data, and the German income tax schedule and let emission intensities decline in the carbon tax. If the revenue from a carbon tax is recycled via a lump-sum transfer to all households, this gives more equitable albeit less efficient outcomes, yet 70% of households are worse off. If the revenue is recycled via lower income taxes, there is more efficiency at the expense of more inequality, and about half of households benefit. With a recycling mix of lump-sum transfers and lower income taxes, popular support can be mustered without hurting equity too much. We also investigate the effects of Germany meeting its legal target for curbing emissions by 55% in 2030 relative to 1990 levels. We find that most of emission reductions are due to producers responding by lowering emission intensities rather than by consumers to less carbon-intensive consumption categories.

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Armon Rezai

Armon Rezai is professor at WU Wien, where he leads the Institute for Ecological Economics. His research focuses on questions of income and wealth distribution and economic growth in the context of climate change and has been published in leading journals such as the American Economic Review and Nature Climate Change. He was a Schrödinger fellow of the Austrian Science Fund and is currently senior guest researcher at IIASA and an external member of OxCARRE at the University of Oxford.

Related literature:

  • Bovenberg, A.L. and F. van der Ploeg (1994). Environmental policy, public finance and the labour market in a second-best world, Journal of Public Economics, 55, 349-390.
  • Cronin, J.A., D. Fullerton and S. Sexton (2019). Vertical and horizontal distributions from a carbon tax and rebate, Journal of the Association of Environmental and Resource Economists, 6, 169-208.
  • Deaton, A. and J. Muellbauer (1980). An almost ideal demand system, American Economic Review, 70, 3, 312-326.
  • Jacobs, B. and F. van der Ploeg (2019). Redistribution and pollution taxes with non-linear Engel curves, Journal of Environmental Economics and Management, 95, 198-226.
  • Lewbel, A. and K. Pendakur (2009). Tricks with Hicks: the EASI demand system, American Economic Review, 99, 827-863.

Keywords: Popular support, Carbon tax, Revenue recycling, Equity, EASI demand system, Labour supply

JEL classification: D12, D31, D62, D63, J22, Q5