Energ. Econ. http://doi.org/hsz (2012)

The effects of environmental policies on low-income groups have always been a concern of policymakers. Carbon taxes in particular are opposed by politicians, especially in developing countries, as they are thought to hit poor people the most.

Fidel Gonzalez of the Sam Houston State University, USA, developed an analytical model to examine the impact of a carbon tax on different income groups in Mexico when the tax revenues are earmarked in two different ways. When the revenues from the tax are used to cut taxes in the manufacturing sector, low-income groups' purchasing power decreases and that of high-income groups increases. However, when tax revenues are given back in the form of a food subsidy, the outcome is reversed and the inequalities in income distribution tend to diminish.

The researcher then calibrated his model with US data and, despite different magnitudes, the findings were confirmed. He concludes that the viability of carbon taxes depends on how their revenues are redistributed in the economy.