Carbon Tax and Equity : The Importance of Policy Design

This research aims at clearing up misunderstandings about the distributive impacts of carbon taxes, which proved to be a decisive obstacle to their further consideration in public debates. It highlights the gap between partial equilibrium analyses, which are close to the agents' perception of the costs of taxation, and general equilibrium analyses, which better capture its ultimate consequences. It shows that the real impact on households' income distribution is not mechanically determined by the initial energy budgets and their flexibilities but also depends upon the way tax revenues are recycled, and upon the general equilibrium consequences of the reform thus defined. The comparison of three tax-recycling schemes, modelled in a general equilibrium framework applied to 2004 France, demonstrates the existence of trade-offs between aggregate impacts on GDP and employment, the consumption of the low-income classes, and a neutralisation of distributive impacts. Two more recycling schemes allow to outline a space for a compromise between the equity and efficiency criteria.