Distributional impacts of heterogenous carbon prices in the EU

We analyse the impact of carbon price heterogeneity on households in the EU from 2010 to 2020 using a novel dataset that combines carbon pricing policies with household budget survey data and a global multiregional input-output framework. Accounting for both heterogeneity in carbon pricing across emission sources and the indirect effects from inter-industry linkages, we obtain two key findings. First, due to incomplete carbon pricing coverage, household burdens have been lower than previously estimated. Second, carbon pricing incidence across income groups differs not only due to varying carbon intensities of demand but also due to differing expenditure shares on products that benefit from exemptions. In the majority of EU countries, low-income households have on average paid higher prices for the carbon embodied in their consumption than high-income households. Closing the carbon pricing gaps, particularly with regard to emissions embodied in imports, can help equalise burdens.