The Carbon Tax,Ageing and Pension Deficits

Ageing increases the income of a carbon tax ceteris paribus since energy consumption rises with age, as macro and micro data show. Ageing also increases some public expenditures, notably those of pay-as-you-go (PAYG) pension systems. Accordingly, there may be a case for recycling a carbon tax in an ageing context so as to finance ageing-related public expenditures. This article studies the interacting effects on intergenerational equity and growth of such a recycling. It relies on a general equilibrium model with overlapping generations parameterised with empirical data. Several results emerge. Implementing a carbon tax fully recycled through higher lump-sum pensions weighs relatively more on the intertemporal welfare of young and future generations. A carbon tax fully recycled through lower social contributions financing the PAYG bolsters the wellbeing of young and future generations but weighs on the welfare of baby-boomers and older cohorts. The redistributive effects of recycling a carbon tax can depend significantly on the way used to balance the PAYG regime.