Carbon Pricing in Residential and Non-Residential Sectors: Household Inequality and Compensation Strategies

Javier Ferri and Francisca Herranz-Báez

No 2025-14, Working Papers from FEDEA

Abstract: This paper analyzes the macroeconomic and distributional impacts of carbon pricing policies targeting both residential and non-residential sectors. Using a model that incorporates nominal price rigidities, sectoral labor adjustment, and financial frictions tied to housing collateral, we uncover critical transmission mechanisms affecting household welfare.Our analysis highlights the distinct effects on borrowers and lenders: carbon pricing in the non-residential sector reduces labor demand and wages, disproportionately impacting borrowers, while residential carbon pricing lowers housing prices, tightening credit constraints for borrowers but imposing higher welfare costs on lenders who own more housing assets.

Date: 2025-12
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