The implementation of ambitious environmental policies may lead to regressive distributional impacts, disproportionately affecting low income population groups. In this study, we expand the state-of-the-art general equilibrium model GEM-E3-FIT to represent 10 income classes in all EU Member States and quantify the distributional impacts of European Union’s ambitious emission reduction targets, in particular exploring their effects on income by skill and on energy-related expenditure by income class. The analysis shows that the transition to climate neutrality may increase modestly inequality across income classes, with low-income households facing the most negative effects. However, using carbon tax revenues as lump-sum transfers to support household income and as reduced social security contributions will increase employment and reduce income inequality across households in EU countries.
This publication has been prepared in the context of EU-funded INNOPATHS and NAVIGATE projects, and you may download it here