The paper investigates the potential distributional effects of a carbon tax on welfare in Italy. We build a general equilibrium OLG model calibrated on Italian data with within-cohort heterogeneity and a production network to analyse the impact of four alternative revenue recycling schemes.
In the long run, given the calibration of the model, it is possible to achieve a welfare gain for all income classes if the carbon tax revenue is rebated through a homogeneous transfer or a uniform reduction in personal income taxes. In the first case, the welfare gain is larger for the lower deciles of the income distribution; in the second case, the improvement is larger for the upper deciles. In the short run, however, the transition results in welfare losses for most of the cohorts alive when the carbon tax is introduced.
