Although widely supported by economists, the carbon tax is struggling to gain a foothold on the agenda of public decision-makers. One of the reasons for its slow uptake is the fear that it may have significant redistributive effects, and in particular penalise the lowest-income households. This paper presents the results of an ex ante evaluation of the redistributive effects on households of the environmental tax reforms in France in 2018. The carbon tax is regressive in itself, but generates additional revenue. By transferring this revenue to all households in a revenue-neutral manner, the reform would become progressive. However, even in this scenario, the reform would generate significant redistributive effects within income groups. These horizontal transfers, which are more difficult to correct, suggest that other tools are needed to reduce the reform’s impact on the most vulnerable. From a long-term perspective, it appears essential to invest in improving the energy efficiency of housing and transport. These policies not only meet environmental requirements but also address the need to reduce the vulnerability of the lowest-income households to future rises in energy prices.
The redistributive effects of carbon taxation in France
This study aims to analyse the redistributive effects that a rise in the price of carbon might entail, and to consider the compensation mechanisms that could be put in place to mitigate these effects.
Reference IPP Policy Brief No. 34
Presentation
Key Results
- The carbon tax is regressive: lower-income households spend a larger proportion of their income on this tax. Replacing social tariffs with the energy voucher does not offset the regressive nature of the tax.
- If the net revenue were distributed equally amongst households, the reform could become progressive. However, it would still generate significant redistributive effects within income groups, and many of the lowest-income households would lose out.
- Lump-sum transfers, even when targeted at the most vulnerable households, do not correct these redistributive effects. Other measures to help households reduce their energy consumption are essential to mitigate these redistributive effects in the long term.
Thomas Douenne