Long-Term Distributional Impacts of European Cap-and-Trade Climate Policies: A CGE Multi-Regional Analysis

Roland Cunha Montenegro, Vidas Lekavičius, Jurica Brajković, Ulrich Fahl and Kai Hufendiek
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Roland Cunha Montenegro: Institute of Energy Economics and Rational Energy Use, University of Stuttgart, Heßbrühlstraße 49A, 70565 Stuttgart, Germany
Vidas Lekavičius: Laboratory of Energy Systems Research, Lithuanian Energy Institute, Breslaujos g. 3, Kaunas 44403, Lithuania
Jurica Brajković: Department for Energy Management and Organisation, Energy Institute Hrvoje Pozar, Savska cesta 163, 10000 Zagreb, Croatia
Ulrich Fahl: Institute of Energy Economics and Rational Energy Use, University of Stuttgart, Heßbrühlstraße 49A, 70565 Stuttgart, Germany
Kai Hufendiek: Institute of Energy Economics and Rational Energy Use, University of Stuttgart, Heßbrühlstraße 49A, 70565 Stuttgart, Germany

Sustainability, 2019, vol. 11, issue 23, 1-26

Abstract: Carbon pricing is a policy with the potential to reduce CO 2 emissions in the household sector and support the European Union in achieving its environmental targets by 2050. However, the policy faces acceptance problems from the majority of the public. In the framework of the project Role of technologies in an energy efficient economy–model-based analysis of policy measures and transformation pathways to a sustainable energy system (REEEM), financed by the European Commission under the Horizon 2020 program, we investigate the effects of such a policy in order to understand its challenges and opportunities. To that end, we use a recursive-dynamic multi-regional Computable General Equilibrium model to represent carbon pricing as a cap-and-trade system and calculate its impacts on consumption of energy goods, incidence of carbon prices, and gross income growth for different income groups. We compare one reference scenario and four scenario variations with distinct CO 2 reduction targets inside and outside of the EU. The results demonstrate that higher emission reductions, compared to the reference scenario, lead to slower Gross Domestic Product growth, but also produce a more equitable increase of gross income and can help reduce income inequalities. In this case, considering that the revenues of carbon pricing are paid back to the households, the gross income of the poorest quintile grows as much as, or even more in some cases, than the gross income of the richest quintile.

Keywords: carbon pricing; CGE; income distribution; scenario analysis; cap-and-trade; carbon market; Energy Policy; Energy Economics; Energy Modeling (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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