Carbon pricing is widely seen as an effective policy option to pursue reductions in GHG emissions. Either through carbon taxes or emissions trading systems (cap and trade), carbon pricing reduces the negative externality of GHG emissions. By putting a price on emissions, economic agents can incorporate this cost in their investment, production, and consumption decisions. In time, this leads to lower emissions. At the same time, this policy can have negative effects on the economy and households, associated with the additional cost of emissions. Research shows that the negative effects can be alleviated or even reversed through revenue redistribution.
The sums collected by Governments can be directed toward investment in low-emissions alternatives and support for low-income households. The European Union’s Emissions Trading System represents a significant example of carbon pricing. It covers emissions from industry and electricity generation and has been effective at achieving emissions reductions. Recently, a separate Emissions Trading System has been introduced for buildings and road transport (ETS2), with the aim of generating similar results in these sectors. There is concern that ETS2 may affect low-income households and the economy in general by purposely increasing the prices of emissions-intensive goods. To address this, the EU also adopted the Social Climate Fund, which uses part of the revenue collected by auctioning emissions allowances to finance investments in low-carbon technologies and support for low-income households.
In this context, this paper adds to the extensive body of evidence on the economic impact of carbon pricing with revenue redistribution. It presents the results of a simulation model of a hypothetical carbon tax in Bulgaria, Germany, Hungary, Poland, and Romania. The macroeconomic impact is evaluated by calculating the effects of this carbon tax on GDP and employment by sector. At micro level, the focus is on households budget, namely on welfare losses across deciles and energy poverty, before and after revenue redistribution.
This project is part of the European Climate Initiative (EUKI). EUKI is a project financing instrument by the German Federal Ministry for Economic Affairs and Climate Action (BMWK). The EUKI competition for project ideas is implemented by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH. It is the overarching goal of the EUKI to foster climate cooperation within the European Union (EU) in order to mitigate greenhouse gas emissions. For more details, please visit: www.euki.de.
Constantin Postoiu, EPG Head of Data Analytics
Constantin is the Head of Data Analytics at EPG. He holds a PhD in Regional Development and a Master Degree in European Economics, both from Bucharest University of Economic Studies. From 2015 to 2017 he worked as advisor to the Chancellery of Prime Minister Dacian Ciolos where he led data driven policies and advised on education, poverty and public administration reform. Prior, he was a trainee at the EU Committee of the Regions, Europe 2020 Monitoring Platform.
Passionate about data analysis and data-based policies, he is also a member of the Advisory Council for the Evaluation of the Impact of Normative Acts, in the Romanian Government.