Understanding the distributional impacts of carbon taxation in EU countries

Carbon taxes are needed to meet emission reduction targets and mitigate climate change but they are costly. These costs are distributed unequally across the population. Concerns over impacts on living costs and the unfair distribution of costs have led to substantial public and political opposition to carbon taxes. As a result, carbon taxes are well below the levels needed to mitigate climate change. Simultaneously, carbon taxes generate revenues that can finance policies to compensate households and make reforms distributionally just. Such revenue recycling can increase the public acceptability of carbon taxation. A key challenge is that the impact of carbon taxes on households is very heterogeneous. As a result, it is impossible to perfectly compensate households and reforms necessarily create winners and losers. Further, the carbon tax burdens and their distribution are region-and country-specific, and reforms likely lead to different outcomes across countries. The main objective of this thesis is to compare the distributional impact of a common carbon tax and various revenue recycling reforms across 6 EU countries. Understanding why and how carbon tax burdens are distributed unequally is essential for two reasons. Firstly, it supports policymakers in designing carbon taxes or devising strategies that mitigate the negative distributional outcomes of the carbon tax, thereby increasing support for higher carbon taxes in the future. Second, it supports policymakers in designing policies to compensate disproportionally affected households and mitigate impacts on purchasing power, thereby increasing political support for carbon taxation today. The second objective of this thesis is to develop a scalable model that can simulate the distributional impact of carbon taxation and revenue recycling. This thesis develops a microsimulation tool (PRICES) that can be used to analyse the impact of a carbon tax with revenue recycling on households before they are implemented. The central argument of this thesis is that there is no "one-size-fits-all" solution to carbon tax regressivity. The carbon tax incidence is complex and carbon taxes can be regressive for various reasons. The incidence of a carbon tax becomes increasingly complex when revenues are returned to households. This in turn results in heterogeneous distributional impacts of carbon taxation and revenue recycling across countries. The various impacts of carbon taxation with revenue recycling arise because numerous factors shape the distributional impact of a carbon tax (some are explored in Chapter 4) and the relationship between households’ carbon tax and compensation payments is imperfect and differs across countries (as shown in Chapter 5). Policies to mitigate the regressive impact of a carbon tax (through its design) and compensate households for the carbon tax (through transfers or tax reductions) should therefore be tailored to the context. The primary contribution of this thesis lies in its in-depth comparative analysis of heterogeneous EU countries and the development of a scalable tool that uses standardized data sources to assess the distributional outcomes of carbon taxation in and across countries. An in-depth comparative analysis allows for further nuance to common conjectures. Chapter 4 shows that the conjecture that the distributional impact of carbon taxation is determined by energy budget shares along the income distribution is only partially accurate and that other factors can be more important in explaining distributional outcomes. Chapter 5 highlights that various revenue recycling schemes, notably place-based transfers, can produce different distributional outcomes depending on the country. A further contribution of this thesis lies in the selection of countries. The selection largely covers countries in which no analyses are available and with heterogeneous average income levels, climates, population structures, and welfare states, making the comparison of impacts of common policy particularly instructive.

Funder

Luxembourg National Research Fund (FNR)

Publisher

University of Galway

Rights

CC BY-NC-ND

cbn

Collections

University of Galway Theses (PhD Theses)