Who ultimately bears the cost of carbon?
Diego Känzig presents a comprehensive analysis of the economic impacts of the European carbon market in his article The Unequal Economic Consequences of Carbon Pricing.
The main findings of the study are:
- The economic cost of a fall in economic activity due to carbon pricing is borne unequally across society, with poorer households being more affected due to their higher energy share and a larger fall in income.
- Carbon pricing leads to a significant and persistent fall in the expenditure of low-income households, while the expenditure of higher-income households only falls marginally.
- Carbon pricing significantly affects both emissions and the economy, causing a strong, immediate increase in energy prices and a persistent fall in overall GHG emissions.
- Carbon pricing also leads to a fall in economic activity, as reflected in lower output and higher unemployment.
- Carbon pricing incentivises green innovation and causes a significant uptick in patenting low-carbon technologies.
- Redistributing carbon revenues can mitigate the fall in aggregate consumption and reduce the regressive distributional consequences of carbon pricing, without compromising emission reductions to a significant extent.
A tighter carbon pricing regime leads to higher energy prices, lower GHG emissions, and more green innovation. This however comes at the cost of a fall in economic activity, which is borne unequally across society.
Targeted fiscal policies can help alleviate these costs and inequalities while maintaining emission reductions. It is critical for low-income households' support for climate policies not to fall in times of increased carbon pricing.