Assessing the efficiency and fairness of the fit for 55 package towards net zero emissions under different revenues recycling schemes for Italy

The need for reforming and modernise the tax system to increase tax efficiency, improve environmental sustainability and regional economic outcomes, is one of the key objectives of Italy, in line with the EU strategy. Within the framework of the European Green Deal, Italy committed to contributing turning the EU into the first climate neutral region by 2050 (“Fit for 55” package): the goal is to reduce emissions by at least 55% by 2030, compared to 1990 levels. Carbon pricing is at the core of the proposal, but its full implementation is also expected to have regressive effects harming poorer households and adverse economic impacts reducing firms’ competitiveness. This paper evaluates the effects of the carbon pricing proposal of the fitfor55 package on welfare, sectoral production and income distribution. To tackle the adverse social and economic effects, it compares different revenue recycling schemes shifting the tax burden from labour or capital and consider all major direct and indirect taxes. It finds that well-targeted revenue recycling policies might significantly reduce the negative effects. We adopt the IRENCGE-DF Model, a new (recursive) dynamic computable general equilibrium (CGE) model developed by the Italian Ministry of the Economy and the World Bank. It has detailed energy specification that allows for capital/labour/energy substitution in production, intra-fuel energy substitution across all demand agents, multi-output multi-input production structure, an extended energy system with 11 different types of technologies, multiple Households to address distributional impacts, and detailed information on the Italian tax system.