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

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.

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.

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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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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 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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