The Welfare Effects and the Distributive Impact of Carbon taxation on Italian Households

In this work the welfare effects and the distributive impact on Italian households of the Italian Carbon tax are calculated. The Carbon tax has been introduced in Italy at the beginning of 1999 asking for smooth increases, over a number of years, in the prices of most fossil fuels. Its welfare effects have been calculated using True Cost of Living index numbers and the Compensating Variation. The parameters have been obtained through estimation of a complete Almost Ideal demand system, using households data from 1985 to 1996. The welfare loss turns out to be quite substantial and affects Italian households in a non-negligible way, but the distribution of welfare losses across different levels of total monthly expenditures does not allow sustaining the regressivity of Carbon taxation, as the effect becomes bigger as we move up the income distribution. This evidence might encourage the use of Carbon taxes, at least in the transport sector, as cost-effective instruments of environmental policy, especially after the ratification of the Kyoto Protocol on Climate Change.