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Financial compensations are often proposed to address regressive distributional impacts of carbon taxes. While financial compensations have shown to benefit vulnerable groups distributionally, little is known about their impacts on emission reduction or needs satisfaction. A potential problem with cash compensations is that if households spend this money back into the economy while no additional decarbonisation policies are implemented, emission reductions that arose from the tax may at least partly be reversed. In this letter, we compare the emission savings and impacts on fuel and transport poverty of two compensation options for carbon taxes in 27 European countries. The first option consists of equal per capita rebates for home energy and motor fuel taxes. The second option is the provision of universal green vouchers for renewable electricity and public transport, supported by additional investments in green infrastructures to meet increased demand for such green consumption. Results show that the first option of tax rebates only supports small emission reductions. In contrast, universal green vouchers with expanded green infrastructures would reduce home energy emissions by 92.3 MtCO 2 e or 13.4%, and motor fuel emissions by 177.5 MtCO 2 e or 23.8%. If green vouchers and infrastructure were provided without a prior tax, emission savings would be slightly lower compared to the ‘tax and voucher’ scheme, but fuel and transport poverty would drop by 4.1 and 2.2 percentage points, respectively. In contrast, taxes with rebates would increase fuel and transport poverty by 4.1 and 1.8 percentage points. These findings demonstrate that it is important to take environmental and energy poverty impacts of compensations for unfair distributional impacts of climate policies into account at the design stage. Such compensation measures can achieve higher emission reductions and reduce energy poverty if they involve an expansion of the provision of green goods and services, and if everyone is given fair access to these goods and services.

Fairness, effectiveness, and needs satisfaction: new options for designing climate policies