Carbon taxes and labor market: Balancing environmental and social impacts

Abstract

This paper explores the impact of carbon taxation on labor market performance, particularly focusing on the adverse effects of rising fuel prices on workers’ mobility, employment, and wages. Using a spatial mismatch job search model, we show that while carbon taxes reduce $C{O}_2$ emissions, they also exacerbate unemployment for workers living far from major job centers and depress wages. Our analysis, grounded in French data, highlights that rural and low-income workers are disproportionately affected by the increased commuting costs. To mitigate these effects, we evaluate compensatory policies such as employment premiums, which can enhance the social acceptability of carbon taxes without compromising environmental goals. The findings underscore the importance of balancing environmental objectives with labor market equity to ensure sustainable and socially inclusive climate policies.