Understanding regressivity: Challenges and opportunities of European carbon pricing

We examine how a European carbon price will affect citizens by studying its incidence on households in 23 countries of the EU. At the national level, the distributional impact before revenue recycling is mainly neutral, sometimes progressive. At an aggregate EU level, however, the impact is regressive because some low-income countries would be strongly affected by the carbon price. While national redistribution can yield a progressive EU incidence, we show that European-wide redistribution is more effective for the most affected households. We offer two indicators to offset regressive distributional effects of EU climate policy, such as the recently proposed Green Deal. The first renders the tax burden proportional; the second focuses on compensating the households most severely affected. Including both indicators in European redistribution makes for a better representation of the initial burden of carbon pricing and could increase public acceptability.

Automated summary

The study found that the impact of European carbon pricing policy at the national level is mainly neutral, sometimes progressive, but regressive at the EU level. In order to address the regressive distributional effects, measures such as making the tax burden proportional and compensating the most affected households can be taken into consideration.