Carbon taxes in Europe do not hurt the poor: Evidence from existing taxation schemes

Abstract

This study investigates the distributional impacts of carbon taxes, traditionally examined through simulation studies on the regressivity of hypothetical tax scenarios. However, the dynamic influence of actually implemented carbon taxes on consumption/income poverty and inequality in a cross-country setting has been less scrutinised. This paper assesses the effect of carbon taxes introduced in the past three decades in 15 European countries on consumption shares of the lowest decile groups, poverty rates and inequality indices. The analysis shows that a $40/ton CO2 tax covering 30 % of emissions leads to a consumption share increase of up to 4 % for the bottom 20 % and 40 % of the population, a trend that persisted for five years post-implementation, particularly in nations that efficiently redistribute carbon tax revenues. This resulted in a modest reduction in consumption inequality over three years. In contrast, the impact of carbon taxes on income poverty and inequality is not statistically significant. These findings suggest that concerns about poverty and inequality due to carbon taxes can be mitigated by implementing a moderate tax combined with a strategically efficient revenue redistribution mechanism.