Giulia Tani

We measure the heterogeneous effects of including a hypothetical carbon tax in retail fuel prices for car drivers. We develop and estimate a structural model of demand and supply for retail fuel in France. The model takes into account the local nature of retail fuel markets in terms of competition and heterogeneity in consumer preferences. We overcome the challenge of not observing fuel sales by developing a novel demand and supply estimation method that exploits station-level fuel prices, cost information, and the price-setting model. Our estimates reveal substantial heterogeneity in price sensitivity and pass-through of the carbon tax to retail prices. We find that consumer surplus losses from the carbon tax differ greatly between locations. Middle-income individuals living in suburban areas are the most negatively affected by the carbon tax. We also find large heterogeneity across individuals conditional on income and population density. Finally, we analyze different compensation mechanisms to redistribute the extra revenue from the carbon tax. Our results suggest that flexible income and population density-based transfers only partially reduce inequalities.