Revenue recycling of a carbon dioxide tax: Results from a general equilibrium model for Switzerland

This paper combines a recent proposal by the Swiss government for a carbon dioxide tax with a policy that uses the tax revenues to lower the pre-existing marginal labor income tax rates, and examines the efficiency and distribution effects of such a revenue recycling policy. The investigation, based on a large-scale general equilibrium model, contrary to other studies, indicates that an environmental tax reform involves negative gross cost, that is, increases welfare even when environmental benefits are not accounted for. The simulation results further show that the adverse distributional effects of a pure carbon dioxide tax are neutralized or even reversed when tax revenues finance cuts of existing taxes.