Compensating households from carbon tax regressivity and fuel Poverty: a micro-simulation study

For households, taxing carbon raises the cost of the energy they use to heat their home and to travel. This paper studies the distributional impacts of the recently introduced French carbon tax and the design of compensation measures. Using a micro-simulation model built on a representative sample of the French population from 2012, I simulate for each household the taxes levied on its consumption of energy for housing and transport. Without recycling, the carbon tax is regressive and increases fuel poverty. However, I show how compensation measures can offset these impacts. A flat cash transfer offsets tax regressivity by redistributing <60% of households' contribution. This result falls to 17% when the transfer is targeted at low-income households. Furthermore, I find that targeting the cash transfer reduces fuel poverty by up to 50% below its pre-tax level with a 30.50 euros/tCO₂ carbon tax. These results demonstrate compensating households is achievable at reasonable cost relative to carbon tax revenues. Carbon taxation even constitutes an opportunity to finance ambitious policies to fight fuel poverty. Highlights - I quantify the distributional impacts of carbon taxation with micro-simulation. - Without recycling, the carbon tax is regressive and increases fuel poverty. - Different designs of cash transfers are compared to protect households. - Regressivity is offset by redistributing <60% of households' contribution. - Targeting the recycling at low-income reduces fuel poverty far below pre-tax level. (author)