"Optimal Carbon Tax Rebates"

Abstract : We study the optimal rebate of carbon tax revenue in an economy with income inequality. We find that carbon taxes reduce the efficiency costs of redistribution, thereby increasing the optimal level of redistribution. However, the optimal rebate schedule is increasing in income, making it less redistributive than a carbon dividend. We quantify our model for the German economy and find that the optimal carbon tax rebate for the richest household is almost twice as high as that for the poorest household.