Lump-sum vs. energy-efficiency subsidy recycling of carbon tax revenue in the residential sector: A French assessment

Empirical evidence suggests that carbon taxes are best accepted when their revenue is used to finance abatement measures. This revenue recycling option has however received little attention in modelling assessments. With the aim of filling this gap, we assess the impact of the French carbon tax on energy use for residential heating and compare the cost-effectiveness and distributional impacts of two revenue recycling options: lump-sum payment and subsidies for home energy retrofits. We do so using Res-IRF, an energy-economy model that provides a highly detailed description of housing features (single vs. multi-family, energy efficiency, heating fuel) and key household characteristics (tenancy status, income). We find that the two recycling options offset the regressive impacts of the tax in comparable ways. Lump-sum recycling is particularly effective in reducing inequalities between owner-occupiers and tenants. In turn, subsidy recycling saves energy and increases comfort more cost-effectively. In the discussion, we further point to some advantages of subsidy recycling from both a political and administrative perspective.