DP16931 Gathering Support for Green Tax Reform: Evidence from German Household Surveys
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.
