2003) “Environmental taxes with heterogeneous consumers: an application to energy consumption in France

and two anonymous referees of this Journal for useful comments. We are particularly grateful to Roger Gordon for his comments and advice. This paper constructs a model with four groups of households who have preferences over labor supply, consumption of polluting (energy related) and non-polluting (non-energy) goods and emissions. It quantifies the model for the French economy and computes its optimal tax equilibria under nine second-best tax regimes. We find that redistributive role of environmental taxes require the polluting goods to be taxed at a rate much below their marginal social damage. They may even require an outright subsidy if the society values equality “a lot”. Secondly, environmental taxes that have an exclusively externality-correcting role, benefit all types–although the gains are rather modest. The gains and losses become more substantial when environmental taxes have a redistributive role as well. Third, setting the environmental tax at its Pigouvian level, rather than its optimal externality-correcting-cum-redistributive level, benefits the high-income group at the expense of the low-income groups. Fourth, nonlinear taxation of polluting goods, and nonlinear commodity taxation in general, is a powerful redistributive mechanism. Fifth, introducing environmental taxes in the current French tax system, with its suboptimal income taxes, results in substantial welfare gains for the highest income group and a sizable loss for the least well-off persons