Geography versus income: The heterogeneous effects of carbon taxation

The distributive effects of carbon taxation are critical for its political acceptability and depend on both income and geographic factors. Using French administrative data, household surveys, and matched employer–employee records, we document that rural households spend 2.8 times more on fossil fuels than urban households and work in firms that emit 2.7 times more greenhouse gases. We incorporate these facts into a spatial heterogeneous-agent model with migration, housing and wealth accumulation, bridging spatial and macroeconomic approaches. Carbon taxes generate 56% larger welfare losses for rural households than for urban households, as the former may be trapped due to mobility frictions and homeownership. While uniform or income-based rebates reduce inequality along the income dimension, they leave large spatial disparities that must be offset through location-based transfers. These results suggest that carbon policies should account for spatial differences to improve political feasibility.