When household electrification is taken into account, the carbon tax incidence becomes age-specific, falling hardest on middle-aged, low-income households. It also creates an equity–efficiency trade-off in how carbon tax revenues are recycled. I develop a life cycle model with a discrete household electrification decision, and include energy as a necessity good and production input. The government taxes carbon to achieve a climate target, and recycles revenues via government spending, lump-sum rebates, renewable-electricity subsidies, or electrification subsidies. Using renewable-electricity subsidies reduces the required carbon tax from €359/tCO2 to €248/tCO2, cutting wage declines by half. However, negative welfare effects concentrate among middle-aged, low-income households, for whom electrifying is as costly as remaining exposed to the tax. The electrification margin explains 43% of aggregate welfare losses, which are concentrated among middle-aged, low-income households. Lump-sum transfers insure these households against the burden from electrification, albeit with larger wage declines.

Presented at: MInt internal seminar University of Amsterdam (2025); Economics internal seminar University of Vienna (2025); SEEMS environmental seminar University of Amsterdam (2026); QED Jamboree 2026, University of Padua; KVS new paper session 2026, Leiden University; 7th WCERE 2026, Nova business school; APF International Conference on Macroeconomics and Finance 2026,  Athens University of Economics and Business; EEA 2026, University College Dublin; Annual Congress IIPF 2026, Lisbon School of Economics;

We study the welfare effects of irrational climate beliefs in the housing market. In an established macroeconomic housing model, we posit two types of households: one type which holds rational beliefs over future flood risk and another type which underestimates flood risk. Climate scepticism in the housing market increases the aggregate welfare cost of rising flood risk, which becomes concentrated among households with mistaken beliefs. Climate sceptics overinvest in coastal housing and under-save against potential flood losses, which reduces their expected welfare. Their behaviour also inflates coastal house prices in general equilibrium, which leads to allocative inefficiency and excessive building in coastal areas. Our quantitative model, calibrated to the United States, shows how climate scepticism affects welfare along the income and wealth distribution. It furthermore assesses the distributional welfare consequences of housing market policies related to flood risk, building restrictions and stricter mortgage requirements.