The Equity and Efficiency of Carbon Taxation: A Multi-Model, Multi-Country Analysis

This paper examines the distributional effects of carbon pricing, with a particular focus on how different carbon tax revenue recycling mechanisms influence within-country inequality. It compares lump-sum transfers (equal per capita redistribution) and labor tax cuts across regions with different levels of economic development, using four integrated assessment models.

The analysis first shows that, compared with the baseline, most climate policy scenarios result in economic losses but also reduce within-region inequality. In most cases, lump-sum transfers are found to be more progressive than labor tax cuts. The progressivity of climate policy decreases with higher levels of economic development and increases with the carbon intensity of economic production.

The analysis also demonstrates that the progressivity of carbon revenue recycling depends on the volume of carbon tax revenues and declines as the carbon tax base is depleted.

In addition, the results indicate that the distributional consequences of carbon pricing depend not only on household expenditure patterns but also on structural changes affecting the share of labor income in total income (the labor share). Accounting for changes in the labor share substantially alters the assessment of tax revenue recycling and narrows the performance gap between labor tax cuts and lump-sum transfers.

Overall, the findings suggest that ambitious climate policies, when combined with appropriate revenue recycling mechanisms, can reduce inequality while increasing the consumption of the poorest households in many regions, particularly in low- and middle-income countries. They also highlight the importance of considering labor income dynamics when evaluating the equity implications of climate policy.

The study contributes to ongoing discussions on the design of equitable and effective climate policies.

The authors acknowledge funding support from the European Union’s Horizon Europe Research and Innovation Programme under Grant Agreement No. 101081604 (PRISMA).

Méjean, A., Leblanc, F., Lefèvre, J., Fragkiadakis, D., Fragkos, P., Garaffa, R., Lynch, C., Vandyck, T., 2026. The Equity and Efficiency of Carbon Taxation: A Multi-Model, Multi-Country Analysis. Clim. Change Econ. 2640010  https://doi.org/10.1142/S2010007826400105