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Between- and Within-Country Distributional Impacts from Harmonizing Carbon Prices in the EU

Author

Listed:
  • Florian Landis

    (CER–ETH – Center of Economic Research at ETH Zurich, Switzerland)

  • Gustav Fredriksson

    (CER–ETH – Center of Economic Research at ETH Zurich, Switzerland)

  • Sebastian Rausch

    (ZEW Leibniz Centre for European Economic Research, Mannheim, Germany, Department of Economics, Heidelberg University, Germany, Centre for Energy Policy and Economics at ETH Zurich, Switzerland, and Joint Program on the Science and Policy of Global Change at Massachusetts Institute of Technology, Cambridge, USA)

Abstract
This paper examines the distributional impacts from (i) harmonizing prices for carbon dioxide emissions across sectors and EU countries and (ii) using alternative rules for carbon revenue distribution. We develop a numerical multi-country multi-sector general equilibrium model of the EU-27 economy which resolves household income deciles, based on micro-survey data on expenditure and income, and markets for fossil fuels, electricity, and (EU-wide and national) tradeable emissions rights. We find that carbon price harmonization yields efficiency gains at the EU level. The distributional effects between countries vary and depend largely on the redistribution of carbon revenues. Based on the rules currently in place in Phase IV of the EU ETS, efficiency gains flow disproportionately to low-income countries. Within-country incidence is progressive or neutral for most countries when revenue redistribution is ignored, and is not much affected by carbon price harmonization. Per-capita-based revenue redistribution rules lead to strong progressive outcomes and yield gains for low-income households. Evaluating different policy options using a social welfare function that incorporates inequality aversion suggests that there is no trade-off between efficiency and equity in harmonizing carbon prices in the EU economy.

Suggested Citation

  • Florian Landis & Gustav Fredriksson & Sebastian Rausch, 2021. "Between- and Within-Country Distributional Impacts from Harmonizing Carbon Prices in the EU," CER-ETH Economics working paper series 21/361, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    • Handle: RePEc:eth:wpswif:21-361
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    References listed on IDEAS

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    2. Boonman, Hettie & Pisciella, Paolo & Reynès, Frédéric, 2024. "The macroeconomic impact of policy measures, technological progress and societal attitude in energy transition scenarios," Energy, Elsevier, vol. 297(C).
    3. Tol, Richard S.J., 2023. "The fiscal implications of stringent climate policy," Economic Analysis and Policy, Elsevier, vol. 80(C), pages 495-504.
    4. Richard S. J. Tol, 2023. "Navigating the energy trilemma during geopolitical and environmental crises," Papers 2301.07671, arXiv.org.
    5. Mier, Mathias & Siala, Kais & Govorukha, Kristina & Mayer, Philip, 2023. "Collaboration, decarbonization, and distributional effects," Applied Energy, Elsevier, vol. 341(C).
    6. Li, Yangfan & Zhang, Xiaoyun, 2023. "Recycling scheme of carbon pricing for inclusive decarbonization and energy transition: A recursive computable general equilibrium analysis in China," Renewable Energy, Elsevier, vol. 217(C).
    7. Jacobs, Leif & Quack, Lara & Mechtel, Mario, 2022. "Distributional effects of carbon pricing by transport fuel taxation," Energy Economics, Elsevier, vol. 114(C).
    8. Leif Jacobs & Lara Quack & Mario Mechtel, 2021. "Distributional Effects of Carbon Pricing by Transport Fuel Taxation," Working Paper Series in Economics 405, University of Lüneburg, Institute of Economics.
    9. Peter Almström & Christer Anderstig & Marcus Sundberg, 2024. "Effects on sectors and regions of a carbon tax increase in Sweden: analysis with an SCGE model," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 73(2), pages 731-756, August.
    10. Guo, Xiaozhu & Huang, Yisu & Liang, Chao & Umar, Muhammad, 2022. "Forecasting volatility of EUA futures: New evidence," Energy Economics, Elsevier, vol. 110(C).
    11. Vandyck, Toon & Weitzel, Matthias & Wojtowicz, Krzysztof & Rey Los Santos, Luis & Maftei, Anamaria & Riscado, Sara, 2021. "Climate policy design, competitiveness and income distribution: A macro-micro assessment for 11 EU countries," Energy Economics, Elsevier, vol. 103(C).
    12. Jia, Zhijie & Wen, Shiyan & Liu, Yu, 2022. "China's urban-rural inequality caused by carbon neutrality: A perspective from carbon footprint and decomposed social welfare," Energy Economics, Elsevier, vol. 113(C).

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    More about this item

    Keywords

    Carbon pricing; Carbon market integration; EU climate policy; Distributional impacts; Cost effectiveness; Computable general equilibrium; Household heterogeneity;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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