Carbon Tax with Macroeconomic Stimulus: GDP as an Inferior Good

Abstract

Structural vector auto-regressions (SVARs) are used to simulate US carbon taxes, treating price plus tax as exogenous. These reduce CO2 and GDP. If this fall in GDP is compensated to leave Disposable Income unchanged, the added income drives further declines in CO2, but also lower GDP. Carbon-heavy GDP is thus seen to be an inferior good for the US, falling as Disposable Income increases.