IPP Policy brief n°34 - July 2018

The redistributive effects of carbon taxation in France

IPP Policy brief n°34

July 2018

Author : Thomas Douenne

Contact thomas.douenne@psemail.eu

…………………………

logo-pdf-minThe redistributive effects of carbon taxation in France

 

…………………………

Summary :

Although widely endorsed by economists, carbon tax is struggling to establish itself on the agendas of public decision-makers. One of the reasons for its slow development is the fear that it might generate major redistributive effects, and in particular discriminate against the lowest-income households. This policy brief presents the findings of an ex ante assessment of the redistributive effects on households of the environmental taxation reforms in France in 2018. Carbon tax is intrinsically regressive, but it generates additional revenue. By transferring this revenue neutrally to all households, a progressive reform would be obtained. However, even in such a situation, the reform would generate considerable redistributive effects within the income groups. Such horizontal transfers, which are more difficult to correct, suggest that other tools are necessary for reducing the impact of the reform on the most vulnerable. Looking to the long term, it appears essential to invest in improving the energy performance of housing and of transport. Such policies meet not only environmental requirements, but also the need to reduce the vulnerability of the lowest-income households to future energy price rises.

Key Points :

  • Carbon tax is regressive: the lower-income households spend a larger share of their resources on this tax. Replacing “social tariffs” (“tarifs sociaux”) with the “energy cheque” (“chèque énergie”) does not make it possible to compensate for the regressivity of the tax.
  • If the net revenue from the tax were paid back homogeneously to households, the reform could become progressive. However, it would still generate major redistributive effects within income groups, and many “losers” among the lowest-income households.
  • Lump sum transfers, even targeted on the most vulnerable households, do not make it possible to correct these redistributive effects. Other instruments helping households to reduce their energy needs are essential in order to mitigate these long-term redistributive effects.