The equity and efficiency tradeoff of carbon tax revenue recycling: A re-examination

This paper examines the macroeconomic and distributive impacts of carbon pricing reforms. We carry out an analysis encompassing modern macroeconomic, public economics of taxation and energy and environmental economics considerations. We analyse an alternative widely debated for the use of carbon tax revenues: lump-sum transfers vs. cuts in existing distortionary taxes. We provide new insights on the efficiency vs. equity trade-offs of carbon pricing policies in the context of an open economy with the case study of France. We show that the terms of the equity-efficiency dilemma and the hierarchy of revenue recycling options crucially depend on the macroeconomic context and on the type of inequalities considered. We show that it is paramount to identify the most vulnerable households and to define the criteria used to award lump-sum transfers accordingly. We conclude that no revenue recycling option is universally superior to another, and more case studies should be carried out to account for specific macroeconomic and national contexts.