Can a carbon tax increase emissions? The backfire effect of carbon tax recycling


Recycling the revenues of a carbon tax can mitigate the distributional impacts and lowers the burden on the lowest income deciles. However, a lump-sum rebate to households induces consumption, hence emissions. In this paper, we study the existence of a backfire effect where emissions increase above the pre-tax level because of the recycling of carbon tax revenues. We build a small theoretical model that we extend using microsimulation on French Households Budgets Surveys with long-term elasticities. We estimate that a €158/tCO2 tax would induce a decrease of 10.9% in emissions, reduced by a uniform lump-sum rebate to a decrease of 5.9% in aggregate emissions. We conclude that the backfire effect is not a sufficient reason to prevent any compensation of the low-income households for the sake of emissions reduction. Indeed, a quarter of households increase their emissions in the face of a lump-sum rebated carbon tax, but the emissions thus emitted represent less than a tenth of the emissions of the 10th (richest) income decile. Recycling only 60% of the carbon tax revenues would reduce the backfire to decrease emissions by almost 8%. Skewing the recycling towards low-income households increases the progressivity of the tax but does not increase emissions. Our study supports the consistency between reducing inequalities and reducing emissions.

CIRED Working paper
Emilien Ravigné
Emilien Ravigné
Postdoctoral researcher in Economics

Emilien Ravigné is a Postdoctoral researcher at Oxford University (INET and the Smith School)