Carbon taxation in Ireland: distributional effects of revenue recycling policies

We calculate the impact of an increase in carbon taxation on carbon emissions and on income inequality. Carbon emissions reduce by 3.94 per cent for a carbon tax increase of €30 per tonne, and 10.24 per cent for an increase of €80 per tonne.

Carbon taxation is found to be regressive, with poorer households spending a greater proportion of their income on the tax than more affluent households. However, returning the carbon tax revenues to households reverses this regressive effect, and the net policy effect is progressive.

A ‘carbon cheque’ that distributes the revenues equally to every household leads to small changes in income inequality, while a targeted mechanism that directs more of the revenues towards less affluent households is more progressive, and actually reduces income inequality. The targeted mechanism resembles recycling the revenues through the tax and welfare system, and thus has lower administrative costs than a ‘carbon cheque’.