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The distributional effects of carbon taxation in Italy

Author

Listed:
  • Francesco Caprioli

    (Bank of Italy)

  • Giacomo Caracciolo

    (Bank of Italy)

Abstract

This paper studies the distributional consequences of introducing a carbon tax – modelled as an energy consumption tax paid by heterogeneous households and firms – in a sectoral general equilibrium OLG model calibrated to the Italian economy. Differences in energy intensity and in the elasticity of substitution between production factors lead to a heterogeneous vulnerability to higher energy prices across sectors. Similarly, high- and low-income households are exposed to energy price changes differently, as the latter devote a larger share of their income to purchasing energy products. We find that, depending on how the government recycles the carbon tax revenue, it is possible to achieve a reduction in energy consumption without harming any household, but only in the long run. Among the redistribution schemes considered, uniform transfers lead to the highest average welfare gains, both in the long term and during the transition. A reduction in the distortionary personal income tax (with a uniform downward shift of the entire average rate schedule) would also make most households better off, although its distributional consequences would be the opposite of those derived from uniform transfers. The former actually benefits poorer households more than richer ones, while for the latter, welfare gains increase further up the income distribution.

Suggested Citation

  • Francesco Caprioli & Giacomo Caracciolo, 2024. "The distributional effects of carbon taxation in Italy," Temi di discussione (Economic working papers) 1463, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_1463_24
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2024/2024-1463/en_tema_1463.pdf
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    References listed on IDEAS

    as
    1. Bovenberg, A Lans & Goulder, Lawrence H, 1996. "Optimal Environmental Taxation in the Presence of Other Taxes: General-Equilibrium Analyses," American Economic Review, American Economic Association, vol. 86(4), pages 985-1000, September.
    2. Bovenberg, A.L. & Goulder, L.H., 1996. "Optimal environmental taxation in the presence of other taxes : General equilibrium analyses," Other publications TiSEM 5d4b7517-c5c8-4ef6-ab76-3, Tilburg University, School of Economics and Management.
    3. Thomas Douenne, 2020. "The Vertical and Horizontal Distributive Effects of Energy Taxes: A Case Study of a French Policy," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 231-254.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    carbon tax; climate change; overlapping generations; revenue recycling;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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