The Distributional Impact of EU Climate and Energy Policies on Households and Possible Mitigation Measures

The EU’s Fit for 55 policy package to reduce net greenhouse gas emissions by at least 55% by 2030 has direct impacts on households. The distributional analysis in this paper is in line with the existing literature in pointing to the risk of a moderately regressive distributional impact and to the resources provided by carbon pricing revenues to mitigate this impact. This paper then analyses the measures through which the Fit for 55 policy package addresses its regressive distributional impacts. The package fosters structural measures for negatively impacted population groups that address the root causes of the relative higher share of energy costs of consumption for poorer households, leaving the design of these measures to the Member States. An example is the Social Climate Fund. New stylised ECFIN E-QUEST macroeconomic modelling scenarios of different ETS revenue uses show that redistributive measures can imply a macroeconomic trade-off in terms of equity and efficiency. In case income related financial measures are used to complement structural measures, the modelling indicates that a targeted reduction of labour taxation instead of lump sum payments could mitigate this trade-off. Additional microeconomic modelling of household heating with income inequality and borrowing constraints highlights that only structural measures boost adoption of cleaner more efficient technologies. Overall, the analysis indicates that, from an economic and fiscal point of view and drawing also on energy crisis lessons, redistributive policy measures should be well targeted and preferably structural.