European Central Bank working paper models carbon tax incidence and finds rural households face higher welfare losses without geography-aware rebates

The European Central Bank published a working paper by Charles Labrousse and Yann Perdereau that studies how the burden of carbon taxation varies by both income and location, using French administrative and survey data combined with a spatial heterogeneous-agent model with endogenous migration and wealth accumulation. The paper, which does not represent the ECB’s views, concludes that geographic differences are a major driver of distributional outcomes and that rebate schemes focusing only on income can materially underperform. Using French microdata, the authors document that rural households spend about 2.8 times more on fossil fuels than Parisian households and work in firms that emit about 2.7 times more greenhouse gases per employee. In model simulations calibrated to deliver a 10% emissions reduction, median welfare losses are 20% higher in rural areas than in Paris (−17.3% versus −14.5% in welfare-equivalent wealth terms). A uniform carbon tax of EUR 100 per ton of CO2 is estimated to cut national emissions by 15% at an average pre-rebate cost of about EUR 600 per household per year, while an EU Emissions Trading System 2-like price of EUR 45 per ton delivers a smaller 3% emissions reduction at about EUR 200 per household, with similar geographic disparities; in revenue-recycling exercises, ignoring geography reduces welfare gains by about 7%, while transfers targeted by both income and location can eliminate geographic inequities and generate average net gains of around EUR 720 for targeted groups.