PP 2021-02
The equity and efficiency trade-off of carbon tax revenue recycling: A re-examination

Emmanuel Combet – Gaëlle Le Treut – Aurélie Méjean – Antoine Teixeira

This paper examines the macroeconomic and distributive impacts of carbon pricing reforms. Nous effectuons une analyse croisant des considérations de macroéconomie moderne, d’économie publique et de fiscalité, et d’économie de l’énergie et de l’environnement. 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.

PP 2021-01

Output-Based Allocation and Output-Based Rebates: A survey

Philippe Quirion

Output-based refunding consists in distributing the value of taxes on pollution, or that of tradable emission allowances, to operators of emitting facilities, in proportion of their current production level. It is called output-based rebating in the case of taxes and output-based allocation in the case of tradable emission allowances. This practice is widespread, especially in climate policies, and has important economic consequences. We analyse these consequences, first in a deterministic setting and then accounting for uncertainty. While output-based refunding is detrimental to welfare in a deterministic, closed economy without prior distortions, it also provides some benefits. In particular, it is an efficient way to limit carbon leakage.
Then, we present the implementation of output-based allocation in the European Union, California, China, New-Zealand and Alberta, and discuss whether it should be maintained or phased out in the coming decades.

Policy Papers

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