The welfare impact of climate action: A distributional analysis for Italy

Valeria Costantini, Chiara Martini, Benedetta Mina and Mariangela Zoli

Energy Economics, 2025, vol. 143, issue C

Abstract: Achieving the climate targets the European Union sets requires a complex policy mix, which is expected to cause a general increase in end-user prices, especially for carbon-intensive goods. For those countries already affected by large inequalities, this constitutes a risk of further negative impacts in distributional terms. This paper contributes to the debate by assessing the distributional impacts on Italian households of a policy mix coherent with the EU climate targets. The policy instruments considered are the removal of fossil fuels subsidies and carbon taxation. The analysis is carried out by soft-linking a dynamic CGE model with a microsimulation model at the household level. The estimation of a consumer demand system includes direct, indirect, and demand-side effects of the policy scenario. We then complement the analysis on the uses-side by simulating the impacts on the sources-side, computing the burden imposed on households by changes in the returns to production factors. The overall impacts of the climate policy lead to a welfare loss for households at all levels of the expenditure distribution. However, we find that both the uses and sources-side impacts of the policy are progressive, and the sources-side effects strongly reinforce the uses-side ones. Finally, we show that reinvesting revenues in clean energy technologies is key to improving the progressivity of climate policies in Italy.

Keywords: Carbon pricing; Demand system estimation; Distributional effects; EU green deal; Fossil fuels subsidies removal; Uses and sources-side impacts (search for similar items in EconPapers)
JEL-codes: C52 C68 D12 D39 H23 Q41 Q52 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:143:y:2025:i:c:s0140988325000040

DOI: 10.1016/j.eneco.2025.108181

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