IMF Working Papers

Distributional Impacts of Heterogenous Carbon Prices in the EU

Author/Editor:

Magnus Merkle ; Geoffroy Dolphin

Publication Date:

July 12, 2024

Electronic Access:

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Summary:

We analyse the consequences of carbon price heterogeneity on households in The EU from 2010 to 2020. Accounting for both heterogeneity in carbon pricing across emission sources and the indirect effects from inter-industry linkages, we obtain two key findings. First, due to widespread carbon pricing exemptions, household burdens are lower than previously estimated. Second, lower-income groups are affected disproportionately, because they spend a smaller share of their expenditure on products that benefit from exemptions than their higher-income counterparts. Therefore, imposing uniform carbon prices both within and across countries would reduce carbon pricing regressivity on household expenditure in the EU. A global price would be most effective in this regard, as it would raise carbon prices embodied in EU imports. Further, because EU economies are open and apply higher average carbon prices than their trade partners, the domestic revenues exceed the costs embodied in EU household consumptions bundles. This increases the scope for reducing the burden of carbon pricing on lower-income households through revenue redistribution. Our results imply that the ongoing extension of carbon pricing to more sectors through the EU ETS II and the introduction of the EU’s CBAM should make carbon pricing less regressive, all else equal.

Series:

Working Paper No. 2024/149

Subject:

Climate policy Environment Greenhouse gas emissions Income National accounts

Frequency:

regular