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Long-Term Distributional Impacts of European Cap-and-Trade Climate Policies: A CGE Multi-Regional Analysis

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  • Roland Cunha Montenegro

    (Institute of Energy Economics and Rational Energy Use, University of Stuttgart, Heßbrühlstraße 49A, 70565 Stuttgart, Germany)

  • Vidas Lekavičius

    (Laboratory of Energy Systems Research, Lithuanian Energy Institute, Breslaujos g. 3, Kaunas 44403, Lithuania)

  • Jurica Brajković

    (Department for Energy Management and Organisation, Energy Institute Hrvoje Pozar, Savska cesta 163, 10000 Zagreb, Croatia)

  • Ulrich Fahl

    (Institute of Energy Economics and Rational Energy Use, University of Stuttgart, Heßbrühlstraße 49A, 70565 Stuttgart, Germany)

  • Kai Hufendiek

    (Institute of Energy Economics and Rational Energy Use, University of Stuttgart, Heßbrühlstraße 49A, 70565 Stuttgart, Germany)

Abstract

Carbon pricing is a policy with the potential to reduce CO 2 emissions in the household sector and support the European Union in achieving its environmental targets by 2050. However, the policy faces acceptance problems from the majority of the public. In the framework of the project Role of technologies in an energy efficient economy–model-based analysis of policy measures and transformation pathways to a sustainable energy system (REEEM), financed by the European Commission under the Horizon 2020 program, we investigate the effects of such a policy in order to understand its challenges and opportunities. To that end, we use a recursive-dynamic multi-regional Computable General Equilibrium model to represent carbon pricing as a cap-and-trade system and calculate its impacts on consumption of energy goods, incidence of carbon prices, and gross income growth for different income groups. We compare one reference scenario and four scenario variations with distinct CO 2 reduction targets inside and outside of the EU. The results demonstrate that higher emission reductions, compared to the reference scenario, lead to slower Gross Domestic Product growth, but also produce a more equitable increase of gross income and can help reduce income inequalities. In this case, considering that the revenues of carbon pricing are paid back to the households, the gross income of the poorest quintile grows as much as, or even more in some cases, than the gross income of the richest quintile.

Suggested Citation

  • Roland Cunha Montenegro & Vidas Lekavičius & Jurica Brajković & Ulrich Fahl & Kai Hufendiek, 2019. "Long-Term Distributional Impacts of European Cap-and-Trade Climate Policies: A CGE Multi-Regional Analysis," Sustainability, MDPI, vol. 11(23), pages 1-26, December.
  • Handle: RePEc:gam:jsusta:v:11:y:2019:i:23:p:6868-:d:293592
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    Cited by:

    1. Davydova Altana, 2023. "Comparing scenarios of the carbon regulation for the BRICS and EAEU economies using the GTAP-E model," Working Papers 0058, Moscow State University, Faculty of Economics.
    2. Turner, Karen & Alabi, Oluwafisayo & Katris, Antonios & Swales, Kim, 2022. "The importance of labour market responses, competitiveness impacts, and revenue recycling in determining the political economy costs of broad carbon taxation in the UK," Energy Economics, Elsevier, vol. 116(C).
    3. Shuyang Chen, 2022. "The inequality impacts of the carbon tax in China," Palgrave Communications, Palgrave Macmillan, vol. 9(1), pages 1-10, December.
    4. Chepeliev, Maksym & Osorio-Rodarte, Israel & van der Mensbrugghe, Dominique, 2021. "Distributional impacts of carbon pricing policies under the Paris Agreement: Inter and intra-regional perspectives," Energy Economics, Elsevier, vol. 102(C).
    5. Yang Xu & Jiahua Hu & Yizheng Wang & Weiwei Zhang & Wei Wu, 2022. "Understanding the Economic Responses to China’s Electricity Price-Cutting Policy: Evidence from Zhejiang Province," Sustainability, MDPI, vol. 14(18), pages 1-24, September.
    6. Hübler, Michael & Wiese, Malin & Braun, Marius & Damster, Johannes, 2024. "The distributional effects of CO2 pricing at home and at the border on German income groups," Resource and Energy Economics, Elsevier, vol. 77(C).
    7. Pinar Korkmaz & Roland Cunha Montenegro & Dorothea Schmid & Markus Blesl & Ulrich Fahl, 2020. "On the Way to a Sustainable European Energy System: Setting Up an Integrated Assessment Toolbox with TIMES PanEU as the Key Component," Energies, MDPI, vol. 13(3), pages 1-36, February.
    8. Gardumi, F. & Keppo, I. & Howells, M. & Pye, S. & Avgerinopoulos, G. & Lekavičius, V. & Galinis, A. & Martišauskas, L. & Fahl, U. & Korkmaz, P. & Schmid, D. & Montenegro, R. Cunha & Syri, S. & Hast, A, 2022. "Carrying out a multi-model integrated assessment of European energy transition pathways: Challenges and benefits," Energy, Elsevier, vol. 258(C).
    9. Lekavičius, V. & Bobinaitė, V. & Galinis, A. & Pažėraitė, A., 2020. "Distributional impacts of investment subsidies for residential energy technologies," Renewable and Sustainable Energy Reviews, Elsevier, vol. 130(C).

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