Distributional effects and hypothetical compensation in scenarios for reaching climate goals in 2030 with CO2 pricing

This paper estimates the magnitudes of two hypothetical compensation schemes in 2030 if motor fuel prices increase successively to reduce CO2 emissions, with the goal of reaching Swedish policy goals for the transport sector by 2030. The two compensation schemes are examined in two price-increasing scenarios: the first, the ESR Scenario, is designed to fulfill the Swedish EU Effort Sharing Regulation (ESR) commitments as of 2045; the second, the High Price Scenario, with larger price increases, is designed to reach the current Swedish national policy goal for the transport sector. These scenarios are compared with the Reference Scenario, in which the prices increase modestly, implying that the national policy goal is not reached for emissions from private cars, such that the government must instead purchase emission quotas to fulfill EU commitments. We estimate the effects on both fuel expenditure and welfare. Two levels of lump-sum transfers are made to vulnerable car owners in rural areas based on the mean fuel expenditure in each income octile. The results indicate that compensation can reduce average welfare losses from fuel price increases for rural car owners to a level similar to those of average car owners in large cities. Furthermore, the fiscal cost of these transfers is well below the public revenues from increased taxes, even when incorporating realistic administration costs. In the ESR Scenario, the low transfer amounts render it questionable whether compensation is justified.