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Distributional effects of carbon taxes: The case of Mexico

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  • Gonzalez, Fidel

Abstract

In this study, I develop an analytical general equilibrium model to assess the distributional effects across income groups of a carbon tax assuming that the revenue from the carbon tax is recycled in two different ways: as a manufacturing tax-cut and a food subsidy. I use this analytical model to provide intuition about the main distributional components. The model is calibrated with data from Mexico to obtain unambiguous price and quantity changes. I find that the distribution of the costs is driven by the way the revenue is recycled. In particular, the costs are distributed regressively when the revenue is recycled as a manufacturing tax cut and progressively when it is recycled as a food subsidy. Providing a food subsidy also generates higher welfare and lower carbon emissions than the manufacturing tax cut. To compare and test the robustness of the numerical findings for Mexico, I calibrate the model with data for a developed country, specifically the U.S.A. Despite differences in the magnitude of the changes in some variables, the general findings mentioned above also hold for U.S.A. data. These results suggest that, as found for the U.S.A. in recent studies, carbon taxes are not necessarily regressive. Rather, the way revenue is recycled is a major determinant of how the carbon tax costs are distributed.

Suggested Citation

  • Gonzalez, Fidel, 2012. "Distributional effects of carbon taxes: The case of Mexico," Energy Economics, Elsevier, vol. 34(6), pages 2102-2115.
  • Handle: RePEc:eee:eneeco:v:34:y:2012:i:6:p:2102-2115
    DOI: 10.1016/j.eneco.2012.03.007
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    More about this item

    Keywords

    Carbon tax; Incidence; Developing countries; Income distribution; General equilibrium;
    All these keywords.

    JEL classification:

    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • O54 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Latin America; Caribbean
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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