Carbon pricing disproportionately hurts poorer households, but cash disbursals from the revenue it raises can compensate these households and lower income inequality. This VoxEU column evaluates the effects of carbon taxes by employing utility-based measures of whether a household is better off. The transparency of such a policy increases political support if a substantial majority of the population benefit from the carbon tax plus cash disbursal. However, endogenous behaviour blunts the effectiveness of such transfers; for Germany, it diminishes political approval from 60% to 30%. Using revenue for lowering income taxes as well for dividends increases popular support back to above 50%.

https://voxeu.org/article/carbon-tax-recycling-and-popular-support-germany