Revenue Recycling and Distributional Design in Green Fiscal Reform: Microsimulation Evidence from Spain

Environmental tax reforms are often criticized for their regressive effects. However, distributional impacts depend crucially on the design of revenue recycling mechanisms. This paper evaluates a comprehensive green fiscal reform package in Spain inspired by the recommendations of the Spanish White Paper on Tax Reform (2022) combining (i) the equalization of diesel and gasoline taxation, (ii) a general increase in fuel excise duties, and (iii) the elimination of electricity-related distortive taxes to promote electrification. Using microdata from the Spanish Household Budget Survey (EPF 2024), we microsimulate the direct incidence of price changes across income deciles, household types and urban-rural location. We show that vulnerability and fiscal loss do not perfectly overlap: while lower-income households face higher budget shares in energy consumption, significant losses are also observed among middle-income and rural households. We then simulate alternative revenue recycling schemes using the fiscal surplus generated by the reform: (1) a universal green transfer, (2) a targeted ecological supplement to the Minimum Income Scheme, and (3) a mixed design combining universal and targeted elements. The full reform packages are evaluated in terms of coverage, inequality (Gini, Reynolds-Smolensky, Kakwani), poverty (FGT indices), and fiscal neutrality. Our results highlight the importance of moving beyond vulnerability-based compensation towards a broader design of revenue recycling that balances environmental incentives, equity and political feasibility. The findings contribute to the literature on green tax reform and just transition by showing how distributional outcomes critically depend on the architecture of the policy mix rather than on the tax instrument alone.