IMF Working Papers

Distributional Impacts of Heterogenous Carbon Prices in the EU

By Magnus Merkle, Geoffroy Dolphin

July 12, 2024

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Format: Chicago

Magnus Merkle, and Geoffroy Dolphin. "Distributional Impacts of Heterogenous Carbon Prices in the EU", IMF Working Papers 2024, 149 (2024), accessed November 23, 2024, https://doi.org/10.5089/9798400280825.001

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Climate policy, Environment, Greenhouse gas emissions, Income, National accounts

Keywords: Carbon pricing, Caribbean, Climate policy, EU economy, EU household consumptions bundles, EU imports, Global, Greenhouse gas emissions, Heterogenous carbon price incidence, Income, Tax incidence, World carbon pricing database

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