Distributional and regional economic impact of energy taxes in Belgium

Abstract

We analyse the macroeconomic and distributional effects of increased oil excises in Belgium by combining a regional Computable General Equilibrium (CGE) model with a microsimulation framework that exploits the rich detail of household-level data. The link between the CGE model and the microlevel is top–down, feeding changes in commodity prices, factor returns and employment by sector into a microsimulation model. The results suggest that policymakers face an equity-efficiency trade-off driven by the choice of revenue recycling options. When the additional revenue is used to raise welfare transfers to households, the reform is beneficial for lower income groups, but output levels decrease in all regions. However, when the energy tax revenue is used to lower distortionary labour taxes, the tax shift is slightly regressive. In this case, national GDP is hardly affected but regional production levels diverge. The impact of the environmental tax reform on income distribution depends strongly on changes in factor prices and welfare payments, whereas sector composition is an important determinant for regional impact variation.