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

Florian Landis (), Gustav Fredriksson () and Sebastian Rausch
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Florian Landis: CER–ETH – Center of Economic Research at ETH Zurich, Switzerland
Gustav Fredriksson: CER–ETH – Center of Economic Research at ETH Zurich, Switzerland

No 21/361, CER-ETH Economics working paper series from CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich

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.

Keywords: Carbon pricing; Carbon market integration; EU climate policy; Distributional impacts; Cost effectiveness; Computable general equilibrium; Household heterogeneity (search for similar items in EconPapers)
JEL-codes: C68 H23 Q43 Q52 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2021-08
New Economics Papers: this item is included in nep-ene, nep-env and nep-isf
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Journal Article: Between- and within-country distributional impacts from harmonizing carbon prices in the EU (2021) Downloads
Working Paper: Between- and within-country distributional impacts from harmonizing carbon prices in the EU (2021) Downloads
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