The network origins of carbon pricing regressivity

Bernardo de Barros Fernandes and Pedro Ferreira

No 845, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: To study the distributive impacts of carbon pricing, we develop a multi-sector general equilibrium model with input-output linkages, heterogeneous households and labor-market segmentation. Input-output linkages propagate price shocks to polluting sectors through the production chains, affecting households through an expenditure channel, according to direct and indirect reliance on taxed goods, and an earnings channel, as type-specific labor demand and profit flows respond to shifting relative prices. Using Brazilian matched microdata, we find regressive effects stemming from both channels in similar intensities. Ignoring production networks leads to a substantial underestimation of both aggregate and distributional effects. Nevertheless, redistributing revenues via targeted social transfers significantly mitigates both inequality and output costs, whereas directing carbon revenues to generic government spending exacerbates skill-based wage gaps.

Date: 2025-03-27
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