A Carbon Tax and the Risk of Inequity

This paper aims at clearing up misunderstandings about the social impacts of carbon taxes, which proved to be a decisive obstacle to their further consideration in public debates. It highlights the gap between the cost of a carbon tax reform as it is spontaneously perceived by the taxpayers and the reality of its ultimate consequences. It shows that the real impact on households' poverty and inequalities is not mechanically determined by the initial burden of energy on consumption budgets and by the capacities of households to alleviate it, but also depends upon the use made of the tax proceeds and the general macroeconomic effects. The comparison of five tax-recycling schemes highlights the existence of trade-offs between maximizing total consumption, reducing unemployment, maximizing the consumption of the low-income classes and reducing income inequality