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Climate action with revenue recycling has benefits for poverty, inequality and well-being

Nature Climate Change volume 11, pages 1111–1116 (2021)Cite this article

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Abstract

Existing estimates of optimal climate policy ignore the possibility that carbon tax revenues could be used in a progressive way; model results therefore typically imply that near-term climate action comes at some cost to the poor. Using the Nested Inequalities Climate Economy (NICE) model, we show that an equal per capita refund of carbon tax revenues implies that achieving a 2 °C target can pay large and immediate dividends for improving well-being, reducing inequality and alleviating poverty. In an optimal policy calculation that weighs the benefits against the costs of mitigation, the recommended policy is characterized by aggressive near-term climate action followed by a slower climb towards full decarbonization; this pattern—which is driven by a carbon revenue Laffer curve—prevents runaway warming while also preserving tax revenues for redistribution. Accounting for these dynamics corrects a long-standing bias against strong immediate climate action in the optimal policy literature.

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Fig. 1: Estimates from the literature on the distribution of the initial burden of a carbon or gasoline tax and the resulting relationship with per capita GDP.
Fig. 2: Trade-offs between climate action, poverty alleviation and inequality turn into synergies with an equal per capita carbon dividend.
Fig. 3: Change in consumption of all quintiles in the 2 °C mitigation pathway with the equal per capita recycling compared with the BAU case with no climate policy.
Fig. 4: The carbon Laffer curve.
Fig. 5: Optimal mitigation with and without equal per capita carbon dividend.

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Data availability

All data used in our version of the model are archived53 and freely available at https://github.com/Environment-Research/revenue_recycling.

Code availability

All model code used to generate results and create figures for this article is archived53 and freely available at https://github.com/Environment-Research/revenue_recycling.

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Acknowledgements

This article has received funding from the NAVIGATE project of the European Union’s Horizon 2020 research and innovation programme under grant no. 821124 (S.F., M. Fleurbaey, U.K., A.M., F.W. and S.Z.) and the NIEHS-funded HERCULES Center P30ES019776 (N.S.). We thank C. Burnham and the Climate Futures Initiative at Princeton University for support.

Author information

Authors and Affiliations

  1. Department of Environmental and Occupational Health and Justice, Rutgers School of Public Health, Center for Population-Level Bioethics, and Department of Philosophy, Rutgers University, New Brunswick, NJ, USA

    Mark Budolfson

  2. Division of Social Sciences, Yale-NUS College, Singapore, Singapore

    Francis Dennig

  3. Energy and Resources Group, University of California, Berkeley, CA, USA

    Frank Errickson

  4. School of Public and International Affairs, Princeton University, Princeton, NJ, USA

    Frank Errickson

  5. Mercator Research Institute on Global Commons and Climate Change (MCC), Berlin, Germany

    Simon Feindt & Ulrike Kornek

  6. Department of Economics of Climate Change, Technische Universität Berlin, Berlin, Germany

    Simon Feindt

  7. Department of Global Health and Population, Harvard TH Chan School of Public Health, Harvard University, Boston, MA, USA

    Maddalena Ferranna

  8. Paris School of Economics, Paris, France

    Marc Fleurbaey

  9. Joint Research Centre, European Commission, Seville, Spain

    David Klenert

  10. Potsdam Institute for Climate Impact Research, Potsdam, Germany

    Ulrike Kornek

  11. Department of Economics, University of Oklahoma, Norman, OK, USA

    Kevin Kuruc

  12. CNRS, CIRED, Nogent-sur-Marne, France

    Aurélie Méjean

  13. School of International Affairs & Department of Civil and Environmental Engineering, Pennsylvania State University, University Park, PA, USA

    Wei Peng

  14. Gangarosa Department of Environmental Health, Rollins School of Public Health, Emory University, Atlanta, GA, USA

    Noah Scovronick

  15. Department of Economics, University of Texas, Austin, TX, USA

    Dean Spears

  16. International Institute for Applied Systems Analysis (IIASA), Laxenburg, Austria

    Fabian Wagner

  17. Paris School of Economics (CNRS), Centre d’Economie de la Sorbonne, Paris, France

    Stéphane Zuber

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Contributions

M.B., F.D., F.E., U.K., K.K. and N.S. are co-lead authors and contributed equally to the study. M.B., F.D., D.K., F.E., M. Ferranna, U.K., K.K., A.M., N.S. and S.Z. designed the research. M.B., F.D., S.F., M. Ferranna, D.K., U.K., K.K., A.M. and S.Z. conducted the literature review on the distributional impact of a carbon tax. F.D., F.E. and K.K. conducted the modelling. F.D., K.K., S.F., M. Ferranna, M. Fleurbaey, D.K., U.K., A.M. and S.Z. led the social welfare and tax analysis. M.B. and N.S. wrote the first draft of the manuscript with contributions from U.K. and K.K. All authors interpreted the results and edited the manuscript.

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Correspondence to Mark Budolfson.

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The authors declare no competing interests.

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Peer review information Nature Climate Change thanks Allen Fawcett and the other, anonymous, reviewer(s) for their contribution to the peer review of this work.

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Supplementary information

Supplementary Information

Supplementary Discussion, Tables 1–4 and Figs. 1–15.

Supplementary Data

Individual studies and implied elasticities from literature review underpinning Fig. 1. Includes country, year, per capita GDP, implied elasticity (by our estimate) and citation information.

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Budolfson, M., Dennig, F., Errickson, F. et al. Climate action with revenue recycling has benefits for poverty, inequality and well-being. Nat. Clim. Chang. 11, 1111–1116 (2021). https://doi.org/10.1038/s41558-021-01217-0

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