How much is too much? Carbon tax thresholds for climate mitigation and social equity

This study investigates how carbon taxation simultaneously affects climate change mitigation and income inequality through potential nonlinear threshold effects. Using a dynamic panel threshold approach and data from 70 countries over the period 2000–2022, the analysis identifies two critical turning points in the effectiveness of carbon taxation. The results show that a carbon tax below $31 per tonne of CO₂ fails to generate sufficient incentives to reduce emissions. Furthermore, while a tax exceeding this level becomes environmentally effective, it also introduces a significant social trade-off: once the tax surpasses $84 per ton of CO₂, it tends to worsen income inequality by disproportionately affecting low-income households. This highlights a narrow policy window where carbon pricing is both environmentally effective and socially neutral. To achieve both objectives, policymakers should adopt a dual strategy — setting carbon taxes above the environmental threshold while simultaneously redistributing revenues to offset regressive effects. Robustness tests using an alternative carbon tax proxy and multiple climate indicators (CO₂ emissions, precipitation, humidity, and temperature) confirm the consistency of the results. Overall, the study provides new empirical evidence on how the precise calibration of carbon taxation can balance sustainability and equity goals in climate policy.