Trying to find a balance: Energy excise duties in the context of climate targets, energy shocks, and redistributive goals

This study examines the implementation of an environmental tax reform in Italy, focusing on changes in excise duties on petrol, diesel and electricity. The reform is in line with the revised European Energy Tax Directive and aims to support European climate objectives. The main motivation of this research is to show how the additional revenues generated by the environmental reform can be used to mitigate its regressive impact on low-income households through cash transfers. The analysis uses a microsimulation model based on data from the Household Budget Survey. The environmental reform combined with the cash transfer is implemented for 2019 and 2022, this latter being a year significantly affected by the energy crisis. The results confirm the inherent regressivity of the environmental tax reform when considered in isolation, but they also reveal significant positive redistributive effects achieved by paying monetary transfers to households in the lowest three income deciles. In this case, the reform enhances redistributive outcomes that remain effective even when the structure of the transfers is modified. The paper also highlights the limited redistributive impact of the 2022 excise tax cuts on fuel, which aimed to address the regressive effects of the energy shock. Again, a targeted cash transfer would have been more effective for low-income households. • The paper analysed the impact of an environmental tax reform on excise duties for petrol, diesel and electricity for Italy. • Revenue-recycling is used to limit the regressive impact on low-income households. • The environmental reform, when considered in isolation, exhibits regressive effects. • The combination of environmental reform and monetary transfer determines positive redistributive effects.