Bridging climate and social equity: Progressive carbon tax simulations for Belgium

This paper explores the distributive impact of a hypothetical carbon tax on households' transport and energy consumption in Belgium. It focuses on the welfare effects across population groups and along the income distribution, as well as on the expected budgetary and environmental effects, accounting for consumer responses under a partial equilibrium microsimulation framework. Given the well-known regressive features of consumption taxes in general, and of energy- or carbon-related taxes in particular, this study evaluates various scenarios for making the carbon tax more progressive and assesses how these methods affect the overall distributional outcomes and reduce emissions. Our results show that it is very difficult to offset the regressivity by changing the carbon tax design. The tax design scenario that has the smallest negative inequality effect and reduces GHG emissions the most, is the one that differentiates the tax on the basis of product category, and more specifically by taxing the most elastic product, which is transport. We also discuss the feasibility of the tax design scenarios, indicating that practical implementation and acceptability issues require careful consideration when designing and introducing the tax.