Jules Linden - The distributional impact of a €30 per ton of CO2 tax across six EU countries

• Presenting author: Jules Linden (Luxembourg Institute of Socioeconomic Research)

• Authors: Jules Linden, Cathal O’Donoghue, Denisa M. Sologon

• Session: B02D - Energy - Tuesday 11:00-12:30 - Erika-Weinzierl Hall

This paper decomposes and compares the distributional impact of a €30 per ton of CO2 tax across six EU countries. We identify large cross-country differences in carbon tax burdens, its composition and drivers of carbon tax regressivity. We provide an in-depth descriptive analysis of the drivers of carbon tax regressivity and quantify the contribution of the key determinants of the carbon tax burden. The carbon tax is regressive in all countries, with larger impacts in poorer countries. No clear relationship between wealth and regressivity emerges, but a carbon tax amplifies inequality more in poorer countries. Using a novel decomposition approach, we show that the primary driver of carbon tax regressivity differs across countries. This implies that the most effective policy lever to mitigate the regressivity of carbon pricing differs across countries. In Lithuania and Hungary, differences in the carbon intensity of the energy mix used for heating contributes most to carbon tax regressivity. Differences in the composition of the consumption basket play an important role in all countries, but less in Lithuania. The largest contribution to carbon tax regressivity in wealthier countries is due to differences in savings rates, implying that in rich countries, carbon tax regressivity is primarily driving by disposable income inequality. Implications for policy are further discussed. Overall, this article suggests that differences in the structure of carbon tax incidence and the drivers in carbon tax regressivity across countries pose a challenge to cross-country policy learning, and highlights the need for in-depth country-level and comparative analysis.