IDEAS home Printed from https://ideas.repec.org/p/iza/izadps/dp17861.html
   My bibliography  Save this paper

Distributional Consequences of Becoming Climate-Neutral

Author

Listed:
  • Hochmuth, Philipp

    (Oesterreichische Nationalbank)

  • Krusell, Per

    (Stockholm University)

  • Mitman, Kurt

    (Stockholm University)

Abstract

The EU has embarked on an ambitious path toward climate neutrality. How difficult will this transition be for the population as a whole and different subsets of consumers? This paper investigates this question using a dynamic general equilibrium model that captures a key feature of energy consumption: the relative energy content in one's consumption basket falls significantly as a function of one's relative income. Thus, poorer consumers are expected to be hit harder by the higher energy prices that we anticipate over the next few decades. In the model, energy---a complementary input to capital and labor---can be produced either using fossil fuel or a "green'' technology. We represent the EU policy in terms of a tax on fossil fuel and show that the European Commission's Fit-for-55 package implies a 168% tax on the fossil-based technology. The output losses from this tax are substantial, and GDP is 9.3% lower in the new steady state. The burden falls primarily on the poor agent who is 50% more worse off than the rich agent. The output losses can be compensated for if the economy achieves a 1.49% annual increase in energy efficiency as outlined in the Fit-for-55 package.

Suggested Citation

  • Hochmuth, Philipp & Krusell, Per & Mitman, Kurt, 2025. "Distributional Consequences of Becoming Climate-Neutral," IZA Discussion Papers 17861, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp17861
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp17861.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Fried, Stephie & Novan, Kevin & Peterman, William B., 2022. "Climate policy transition risk and the macroeconomy," European Economic Review, Elsevier, vol. 147(C).
    2. Daron Acemoglu & Philippe Aghion & Leonardo Bursztyn & David Hemous, 2012. "The Environment and Directed Technical Change," American Economic Review, American Economic Association, vol. 102(1), pages 131-166, February.
    3. John Hassler & Per Krusell & Conny Olovsson, 2021. "Directed Technical Change as a Response to Natural Resource Scarcity," Journal of Political Economy, University of Chicago Press, vol. 129(11), pages 3039-3072.
    4. Timo Boppart, 2014. "Structural Change and the Kaldor Facts in a Growth Model With Relative Price Effects and Non‐Gorman Preferences," Econometrica, Econometric Society, vol. 82, pages 2167-2196, November.
    5. Stephie Fried, 2018. "Climate Policy and Innovation: A Quantitative Macroeconomic Analysis," American Economic Journal: Macroeconomics, American Economic Association, vol. 10(1), pages 90-118, January.
    6. Viral V. Acharya & Robert F. Engle III & Olivier Wang, 2025. "Strategic Commitments to Decarbonize: The Role of Large Firms, Common Ownership, and Governments," NBER Working Papers 33335, National Bureau of Economic Research, Inc.
    7. Stephie Fried & Kevin Novan & William Peterman, 2018. "The Distributional Effects of a Carbon Tax on Current and Future Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 30-46, October.
    8. Chris Papageorgiou & Marianne Saam & Patrick Schulte, 2017. "Substitution between Clean and Dirty Energy Inputs: A Macroeconomic Perspective," The Review of Economics and Statistics, MIT Press, vol. 99(2), pages 281-290, May.
    9. Mikhail Golosov & John Hassler & Per Krusell & Aleh Tsyvinski, 2014. "Optimal Taxes on Fossil Fuel in General Equilibrium," Econometrica, Econometric Society, vol. 82(1), pages 41-88, January.
    10. Airaudo, Florencia & Pappa, Evi & Seoane, Hernán, 2022. "Greenflation: The cost of the green transition in small open economies," Research Department working papers 1994, CAF Development Bank Of Latinamerica.
    11. Auclert, Adrien & Monnery, Hugo & Rognlie, Matthew & Straub, Ludwig, 2023. "Managing an Energy Shock: Fiscal and Monetary Policy," CEPR Discussion Papers 18340, C.E.P.R. Discussion Papers.
    12. Muellbauer, John, 1976. "Community Preferences and the Representative Consumer," Econometrica, Econometric Society, vol. 44(5), pages 979-999, September.
    13. Maximilian Konradt & Beatrice Weder, 2023. "Carbon Taxation and Greenflation: Evidence from Europe and Canada," Journal of the European Economic Association, European Economic Association, vol. 21(6), pages 2518-2546.
    14. John Hassler & Per Krusell & Conny Olovsson, 2021. "Presidential Address 2020: Suboptimal Climate Policy [“Climate Change Uncertainty Spillover in the Macroeconomy.”]," Journal of the European Economic Association, European Economic Association, vol. 19(6), pages 2895-2928.
    15. John Muellbauer, 1975. "Aggregation, Income Distribution and Consumer Demand," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(4), pages 525-543.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fries, Steven, 2023. "Sequencing decarbonization policies to manage their macroeconomic impacts," INET Oxford Working Papers 2023-26, Institute for New Economic Thinking at the Oxford Martin School, University of Oxford.
    2. Adrien Bilal & James H. Stock, 2025. "Macroeconomics and Climate Change," NBER Working Papers 33567, National Bureau of Economic Research, Inc.
    3. Priftis, Romanos & Schoenle, Raphael, 2025. "Fiscal and macroprudential policies during an energy crisis," Working Paper Series 3032, European Central Bank.
    4. Ara Jo & Christos Karydas, 2023. "Firm Heterogeneity, Industry Dynamics and Climate Policy," CER-ETH Economics working paper series 23/378, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    5. Wiskich, Anthony, 2024. "A carbon tax versus clean subsidies: Optimal and suboptimal policies for the clean transition," Energy Economics, Elsevier, vol. 132(C).
    6. Guido Ascari & Andrea Colciago & Timo Haber & Stefan Wöhrmüller, 2025. "Inequality along the European green transition," Working Papers 830, DNB.
    7. Ara Jo & Christos Karydas, 2022. "Firm Heterogeneity, Industry Dynamics and Climate Policy," Department of Economics Working Papers 94/22, University of Bath, Department of Economics.
    8. Jo, Ara & Miftakhova, Alena, 2024. "How constant is constant elasticity of substitution? Endogenous substitution between clean and dirty energy," Journal of Environmental Economics and Management, Elsevier, vol. 125(C).
    9. Adão, Bernardino & Narajabad, Borghan & Temzelides, Ted, 2024. "Renewable technology adoption costs and economic growth," Energy Economics, Elsevier, vol. 129(C).
    10. Chafwehé, Boris & Colciago, Andrea & Priftis, Romanos, 2025. "Reallocation, productivity, and monetary policy in an energy crisis," European Economic Review, Elsevier, vol. 173(C).
    11. José-Luis Cruz & Esteban Rossi-Hansberg, 2024. "The Economic Geography of Global Warming," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(2), pages 899-939.
    12. Dobkowitz, Sonja, 2024. "Meeting Climate Targets: The role of fossil research subsidies," VfS Annual Conference 2024 (Berlin): Upcoming Labor Market Challenges 302410, Verein für Socialpolitik / German Economic Association.
    13. Campiglio, Emanuele & Spiganti, Alessandro & Wiskich, Anthony, 2024. "Clean innovation, heterogeneous financing costs, and the optimal climate policy mix," Journal of Environmental Economics and Management, Elsevier, vol. 128(C).
    14. Fried, Stephie & Novan, Kevin & Peterman, William B., 2022. "Climate policy transition risk and the macroeconomy," European Economic Review, Elsevier, vol. 147(C).
    15. Dietz, Simon & Lanz, Bruno, 2025. "Growth and adaptation to climate change in the long run," LSE Research Online Documents on Economics 127218, London School of Economics and Political Science, LSE Library.
    16. Gregory Casey, 2024. "Energy Efficiency and Directed Technical Change: Implications for Climate Change Mitigation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(1), pages 192-228.
    17. David Comerford & Alessandro Spiganti, 2023. "The Carbon Bubble: climate policy in a fire‐sale model of deleveraging," Scandinavian Journal of Economics, Wiley Blackwell, vol. 125(3), pages 655-687, July.
    18. Emanuele Campiglio & Alessandro Spiganti & Anthony Wiskich, 2023. "Clean innovation and heterogeneous financing costs," Working Papers 2023: 07, Department of Economics, University of Venice "Ca' Foscari".
    19. Ara Jo & Alena Miftakhova, 2022. "How Constant is Constant Elasticity of Substitution? Endogenous Substitution between Clean and Dirty Energy," CER-ETH Economics working paper series 22/369, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
    20. Javier Moreno & Juan Pablo Medina & Rodrigo Palma-Behnke, 2023. "Latin America’s Renewable Energy Impact: Climate Change and Global Economic Consequences," Energies, MDPI, vol. 17(1), pages 1-48, December.

    More about this item

    Keywords

    inequality; green transition; Fit-for-55;
    All these keywords.

    JEL classification:

    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:iza:izadps:dp17861. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Holger Hinte (email available below). General contact details of provider: https://edirc.repec.org/data/izaaade.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.