Geography versus Income: The Heterogeneous Effects of Carbon Taxation

The distributive effects of carbon taxation are critical for its political acceptability and depend on both income and geographic factors. Using French administrative data, household surveys, and matched employer-employee records, we document that rural households have a fossil fuel consumption share 2.8 times higher than that of urban households and are employed in firms that emit 2.7 times more greenhouse gases. We incorporate these insights into a spatial heterogeneous agent model with endogenous migration and wealth accumulation, linking spatial and macroeconomic approaches. After an increase in carbon taxes, we quantify that rural households face 20% higher welfare losses than urban households. These losses are amplified in the short run by wage declines, but partially offset in the long run by migration and lower rents. Compared to uniform transfers, jointly targeting income and geographic location increases median welfare gains by one third more than those achieved by income targeting alone. We conclude that carbon policies should account for spatial differences to improve political feasibility.