Distributional Effects of Carbon Taxes: The Case of Mexico

Posted: 2 Jul 2014

See all articles by Fidel Gonzalez

Fidel Gonzalez

Sam Houston State University - College of Business Administration - Department of Economics and International Business

Date Written: 2012

Abstract

In this study, I develop an analytical general equilibrium model to assess the distributional effects across income groups of a carbon tax assuming that the revenue from the carbon tax is recycled in two different ways: as a manufacturing tax-cut and a food subsidy. I use this analytical model to provide intuition about the main distributional components. The model is calibrated with data from Mexico to obtain unambiguous price and quantity changes. I find that the distribution of the costs is driven by the way the revenue is recycled. In particular, the costs are distributed regressively when the revenue is recycled as a manufacturing tax cut and progressively when it is recycled as a food subsidy. Providing a food subsidy also generates higher welfare and lower carbon emissions than the manufacturing tax cut. To compare and test the robustness of the numerical findings for Mexico, I calibrate the model with data for a developed country, specifically the U.S.A. Despite differences in the magnitude of the changes in some variables, the general findings mentioned above also hold for U.S.A. data. These results suggest that, as found for the U.S.A. in recent studies, carbon taxes are not necessarily regressive. Rather, the way revenue is recycled is a major determinant of how the carbon tax costs are distributed.

Keywords: Carbon tax, Incidence, Developing countries, Income distribution, General equilibrium

JEL Classification: H23, Q54, Q52, Q56

Suggested Citation

Gonzalez, Fidel, Distributional Effects of Carbon Taxes: The Case of Mexico (2012). Energy Economics, Vol. 34, 2012. Available at SSRN: https://ssrn.com/abstract=2461029

Fidel Gonzalez (Contact Author)

Sam Houston State University - College of Business Administration - Department of Economics and International Business ( email )

Huntsville, TX 77341-2118
United States

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