The distributional impact of climate policy stringency in the European Union

Environmental deterioration has become a central policy concern, reflected in initiatives such as the European Green Deal, which aim to steer European economies toward low-carbon development. While this transition is environmentally necessary, it may also generate uneven social and economic consequences. This study examines the distributional effects of environmental policy adoption and stringency in 26 European OECD countries over the period 1990–2022. Climate policy stringency is measured using the OECD's Climate Actions and Policies Measurement Framework (CAPMF), and income inequality is captured through three indicators: pre-tax national income Gini, disposable income Gini, and post-tax national income Gini. These measures allow assessment of inequality at different stages of the redistribution process. The analysis employs the Augmented Mean Group (AMG) estimator, which is suited to the panel's characteristics of slope heterogeneity, cross-sectional dependence, and potential endogeneity. The results show that greater climate policy stringency is associated with higher pre-tax and post-tax income inequality, suggesting that the costs of climate policy may fall disproportionately on lower-income groups. By contrast, the effect on disposable income inequality is not statistically significant, indicating that taxes and direct cash transfers can mitigate these adverse distributional effects. At the same time, the persistence of a positive association for post-tax inequality suggests that broader redistributive mechanisms, including in-kind transfers, do not fully offset them. These findings are robust across alternative specifications and estimators. Overall, the results suggest that a just green transition requires not only ambitious environmental policy, but also well-targeted redistributive measures to prevent inequality from widening.