Conference Agenda

Taxes on the carbon embedded in households' consumption (footprint) can stimulate greener demand without triggering the competitiveness and carbon leakage issues often associated with taxing carbon on producers. While this is an appealing combination for the just transition plans of the European Union (EU), concerns about equity and public acceptance, as exemplified by the yellow-vest protests, remain. This paper assesses the potential redistributive consequences of various designs of an EU-wide carbon tax on households' carbon footprints, using harmonized microdata on income and expenditures alongside greenhouse gas intensities from an environmentally extended input-output model. Results from our micro-simulations suggest that a flat carbon tax would be regressive, and as such, inequality-increasing, in all EU countries. This is primarily due to the increasing shares of highly GHG-intense necessity goods, such as food and residential energy, towards the bottom of the distribution. Still, we show that inequality can be reversed with compensatory (revenue-recycling) cash transfers. More interestingly, we also show that more progressive tax designs could enable many countries to offset a large part of this negative redistributive effect without relying on cash transfers —an option often deemed infeasible in policy contexts.