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EMF WP 120.9: The Distributional Impacts of a Carbon Tax

Two economic models of the U.S. economy – DRI’s macroeconomic model and Jorgensen/Wilcoxen’s computable general equilibrium model – have been used to examine the consequences of mitigating carbon dioxide (CO2) emissions by imposing a carbon tax and directing the tax revenues to alternative uses – e.g., debt reduction or reduction in other forms of taxation. The results of the economic models were then used as inputs into three distributional models: (1) DRI’s CES/DECO model, (2) the Jorgensen/Slesnick/Wilcoxen (J/S/W) model, and (3) the Urban Institute’s TRIM2 model. The results indicate that a carbon tax at the levels analyzed would have a small, slightly regressive impact. However, the analysis indicates that the slight regressivity of a carbon tax can be offset by various tax recycling mechanisms or changes in transfer programs.