This paper examines the macroeconomic and distributional effects of the European Union’s transition to Net Zero emissions through a gradually increasing carbon tax. I develop a New Keynesian Environmental DSGE model with two household types and distinct energy and non-energy sectors. Five alternative uses of carbon tax revenues are considered: equal transfers to households, targeted transfers to Hand-to-Mouth households, subsidies to green energy firms, and reductions in labor and capital income taxes. In the absence of technological progress, the carbon tax policy induces a persistent increase in energy prices and a reduction in GDP, investment, and consumption. Headline inflation falls below zero in the medium run, reflecting weaker aggregate demand. Distributional outcomes vary significantly depending on the implemented revenue recycling scheme: targeted transfers are the most progressive but entail larger macroeconomic costs, while subsidies and tax cuts mitigate output and investment losses but are less effective in narrowing the consumption gap. A limited foresight scenario, in which agents learn about policy targets sequentially, generates more volatile adjustment paths and temporary inflationary spikes around announcements, but long-run outcomes remain close to the baseline.

Climate policy design must balance emissions mitigation with concerns for fairness, particularly as climate change disproportionately affects the poorest households within and across countries. Integrated Assessment Models used for global climate policy evaluation have so far typically not considered inequality effects within countries. To fill this gap, we develop a global Integrated Assessment Model representing national economies and subnational income, mitigation cost, and climate damage distribution and assess a range of climate policy schemes with varying levels of effort sharing across countries and households. The schemes are consistent with limiting temperature increases to 2 °C and account for the possibility to use carbon tax revenues to address distributional effects within and between countries. We find that carbon taxation with redistribution improves global welfare and reduces inequality, with the most substantial gains achieved under uniform taxation paired with global per capita transfers. A Loss and Damage mechanism offers significant welfare improvements in vulnerable countries while requiring only a modest share of global carbon revenues in the medium term. The poorest households within all countries may benefit from the transfer scheme, in particular when some redistribution is made at the country level. Our findings underscore the potential for climate policy to advance both environmental and social goals, provided revenue recycling mechanisms are effectively implemented. In particular, they demonstrate the feasibility of a welfare improving global climate policy involving limited international redistribution.

The female labor income share update is based on the methodology by Neef and Robilliard (2022). This update provides estimates of the female labor income share for 1990 –2023. This methodological note explains the data sources and methodology in detail, highlighting data availability and new data that was incorporated.

This paper analyzes the distribution and composition of pre-tax national income in Germany since 1992, combining personal income tax returns, household survey data, and national accounts. Inequality rose from the 1990s to the late 2000s due to falling labor incomes among the bottom 50% and rising incomes in the top 10%. This trend reversed after 2007 as labor incomes across the bottom 90% increased. The top 1% income share, dominated by business income, remained relatively stable between 1992 and 2019. A large share of Germany’s top 1% earners are non-corporate business owners in labor-intensive professions. At least half of the business owners in P99-99.9 and a quarter in the top 0.1% operate firms in professional services – a pattern mirroring the United States. From 1992 to 2019, Germany’s top 0.1% income concentration exceeded France’s and matched U.S. levels until the late 2000s.