Emmanuel Combet

Frédéric Ghersi

Jean-Charles Hourcade

Camille Thubin

A Carbon Tax and the Risk of Inequity

Centre International de Recherche sur

l’Environnement et le Développement

CIRED-CNRS, Paris France

1. Indirect compensations

• Tax reductions (Capital &/or labor)

• Best for activity and employment (‘efficiency’)

2. Direct compensations

• Money transfers to households

• Best for targeting and redistribution (‘equity’)

What is the best use of the tax revenue ?

20 income groups

Productions (3 Energies + 1 ‘Composite’)

Public administrations

Rest of the world

Various policy instruments & targets

Taxes Final demand

Prices, Incomes

Exports

Imports

Transfers

Involuntary unemployment

(non-walrasian wages) Payroll & other taxes

Limited response of trade to production costs

Limited potentials for energy saving

Monetary and physical accounting (Energy in ton oil equivalent)

A Second-Best General Equilibrium Analysis

France in open-economy IMACLIM model

Limited potentials for energy saving

Employment

Consumption of

the poorest 5%

GDP

Equality

(Inverted

Gini)

Carbon tax - Lower SS Contributions

Carbon tax - Transfers to households

0.94

1.06

1.06

1.06 1.06

Comparable CO2 emissions

reductions over 1985-2004

A Trade-off Between Equity and Efficiency

Same Public Debt to GDP ratio

Historical France (2004)

Carbon Tax and Transfers

to households

Lower social security

contributions

Total variation +3.7% -1.0%

Energy costs variation +1.6% +1.6%

Net wages variation +0.1% +1.5%

Labour tax variation id. -3.6%

Contrasted Effects on Production Costs and Wages

Employment intensity

+

Carbon Tax - Lower Social Contributions

Domestic consumption

Employment

Production

Competitiveness

Production costs & Net wages

+

+

Country’s oil bill

-

A Potential Positive Effect on the Macroeconomy

Carbon tax

& lower S.S.

contributions

Energy bills Unemployment

(% pts)

Disposable

Income

Gini

inequality

index

Poorest 5% +78.3% -12.2 +5.4%

+0.3 pts

Richest 5% +72.0% -0.9 +7.3%

Poverty Alleviation… but slightly Higher Disparities

• Significant indirect redistributive effects (employment, income distribution)

Employment

GDP

0.94

1.06

1.06

1.06 1.06

There is room for compromises

Carbon tax - Targeted Compensations & Lower Social Contributions

Similar effect on CO2 emissions

over the period (1985-2004)

Same Public Debt to GDP ratio

Historical France (2004)

Consumption of

the poorest 5%

Equality

(Inverted

Gini)

Targeted Compensations are more Efficient

Carbon tax, lower SS Contrib. and Non targeted

compensations

Targeted

compensations

Revenue allocated to compensations 42.8% 24.3%

Production costs +1.3% +0.3%

Net wages +4.0% +5.7%

GDP +0.6% +1.2%

Employment +1.9% +2.7%

Inequalities (Gini) -0.3 pts -0.4 pts

Policy Implications

Crucial ‘parameters’ to find the best compromise:

• Balance between wage progression, control of costs, redistribution

• Balance between redistribution costs and targeting costs

Emmanuel Combet

Frédéric Ghersi

Jean-Charles Hourcade

Camille Thubin

A Carbon Tax and the Risk of Inequity

Centre International de Recherche sur

l’Environnement et le Développement

CIRED-CNRS, Paris France