Who decarbonizes? Effects of uniform and differentiated carbon pricing on carbon inequality

In many countries, consumption-based emissions are increasingly concentrated at the top of the distribution, and there are growing calls in public debate for climate policy to target emission-intensive luxury consumption more strongly. Yet while financial distributional effects of carbon pricing are well studied, its impact on the distribution of emissions across households remains less well understood. This paper first characterizes the demandside conditions under which uniform carbon pricing increases or decreases consumption-based carbon inequality within countries in a simple partialequilibrium setting with heterogeneous households. Applying the main result to Germany suggests that uniform carbon pricing would slightly reduce carbon inequality, while a stylized approximation of carbon pricing in Germany increases it. The paper then compares differentiated carbon pricing, where luxury goods are priced at a higher rate than necessities, with the standard benchmark of uniform carbon pricing. While the latter is attractive in terms of efficiency, it does not necessarily outperform differentiated pricing, both regarding financial and emissions-based distributional effects.