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

This paper examines the macroeconomic and distributive impacts of carbon pricing reforms. We analyse hybrid schemes to recycle carbon tax revenues. Using a computable general equilibrium model, 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. • We study the macroeconomic and distributive impacts of carbon pricing reforms. • We use a CGE to analyse hybrid carbon tax revenue recycling schemes. • Ranking of schemes depends on the macroeconomic context and the type of inequalities. • In France reforms should combine labour tax cuts and targeted transfers to households. • A hybrid recycling scheme performs better than subsidising energy prices for all.