## 2.   Distributional Impacts Across Scenarios

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---

### Introduction and context
- Purpose: Assess distributional impacts of imminent EU climate policy changes—the phase-out of free allowances, implementation/expansion of CBAM, rising ETS permit prices, and introduction of ETS2—and implications for the Netherlands’ acceptability of reforms.
- Key contextual numeric points:
  - Additional revenue from EU ETS reforms: 0.7 percent of GDP in 2030.
  - Projected effect on purchasing power: 1.9 percent decrease in purchasing power in 2030.
  - Current vehicle-related taxes raise around 1.5 percent of GDP and are projected to nearly halve by 2035.
  - Projected nationwide electricity demand increase due to EVs: a nine percent increase by 2030.
  - EU ETS target: reduce GHG emissions by 62 percent by 2030 relative to 2005.
  - 2024 average EU allowance price: €65 per metric ton.
  - Expected ETS allowance prices by 2030: nearly €150 per metric ton (examples: €149 and €135 forecasts cited).
  - Scenario CO2e price assumption: €100 per ton of CO2e by 2030 (modeled scenario).

### Major policy changes and timing
- CBAM and free allowances:
  - CBAM transitional reporting phase ends end-2025; full CBAM implementation (importers purchase/surrender certificates) begins in 2026.
  - Free allowances phased out from 2026 to 2034.
  - Potential CBAM scope expansion to all ETS sectors by 2030.
- ETS2 (transport and buildings):
  - ETS2 aims to reduce emissions from fuels used in buildings and road transport by 42 percent by 2030 relative to 2005.
  - Allowance trading under ETS2 expected to begin in 2027.
  - Social Climate Fund (SCF) goal: mobilize at least €86.7 billion from 2026 to 2032; Member States must co-finance 25 percent of activities in National Social Climate Plans.

### Methodology overview
- Scenarios modeled (additive):
  - Baseline scenario: current EU ETS at €65 per ton CO2e.
  - Expanded CBAM scenario: expanded CBAM by 2030 covering all ETS products.
  - CO2e price increase scenario: existing ETS + expanded CBAM + price increase to €100 per ton of CO2e by 2030.
  - ETS2 scenario: adds coverage of transport and buildings (ETS2) to the above.
- Transmission channels analyzed:
  - Consumption channel: household spending on fuels and goods (Netherlands Household Budget Survey 2015).
  - Sectoral pass-through: sector-specific passthrough of carbon costs into consumer prices (GTAP IO matrix used).
  - Pass-back: firm responses when costs are not passed to prices (reducing wages, employment, or profits).
  - Free allowances: free allocations plus price passthrough can create windfall profits accruing to capital owners.
- Revenue recycling assumption:
  - Assume 8 percent of ETS revenues are allocated to targeted cash transfers for vulnerable households.
  - Assume Dutch share of SCF spending increases targeted cash transfers by an amount equal to its share of the SCF per EU guidelines.
- Data and limits:
  - Consumption microdata: European Household Budget Survey for the Netherlands, 2015.
  - Results represent upper-bound estimates; do not account for long-run structural transformation.

### Key quantitative findings
- EU ETS and carbon pricing:
  - 2024 average allowance price: €65 per metric ton.
  - Price trajectory expected to rise to nearly €150 per metric ton by 2030 (examples cited: Bloomberg NEF €149 per metric ton; Morgan Stanley €135 per metric ton).
  - Modeled CO2e price in scenario: €100 per ton of CO2e by 2030.
- Social and fiscal measures:
  - SCF mobilization target: at least €86.7 billion from 2026 to 2032.
  - SCF Member State co-financing requirement: 25 percent.
  - Temporary lump-sum transfer example: €380 per household (Nov–Dec support referenced).
  - Electricity price cap example: €0.40 per kWh up to an annual use of 2900 kWh.
  - Gas price cap example: €1.45 per m³ up to an annual use of 1200 m³.
  - Share of population in energy poverty: around 7 percent.
  - Assumed share of ETS revenues allocated to targeted transfers: 8 percent.
  - Dutch average tax rate across deciles (pre-transfers): approximately 45 percent to 48 percent of pre-tax income.
  - Benefit rate: reaches 85 percent for the poorest decile and around 5 percent for the richest.

### Distributional impact findings and channels
- Aggregate impacts and channels:
  - Impacts operate through consumption-price channels, passthrough, pass-back, and free allowances.
  - Under baseline and modeled scenarios, effects via consumption are broadly homogeneous across income deciles and urban/rural households.
  - Implementation of CBAM and elimination of free allowances alter distributional patterns by increasing passthrough and thereby shifting incidence.
  - Full passthrough (assumed once CBAM is implemented) reduces pass-back but enables windfall profits from free allowances that disproportionately benefit high-income households.
- Consumption-channel specifics:
  - Direct (fuel) vs indirect (embedded emissions) effects offset each other, producing broadly uniform impact across income groups when only the consumption channel is considered.
  - Lower-income households spend about 9 percent of their budget on fuels versus 7.5 percent for higher income households.
  - Low-income rural household in the 75th percentile: about 12.5 percent of total consumption on fuels; similarly placed urban household: 10.6 percent; high-income urban household: around 7.3 percent.
  - Overall impact when both direct and indirect consumption channels are considered: around 0.3 percent of household’s purchasing power across income groups and types of households.
- Pass-back and progressivity:
  - Imperfect pass-through (pass-back) makes the distributional impact more progressive because higher-income households bear greater losses via reduced capital income concentrated at the top.
  - Exact estimated distribution of profit losses due to pass-back:
    - 37 percent of total profit losses fall on the top income decile.
    - 23 percent fall on the ninth decile.
  - Profit losses from pass-back are estimated to be higher than windfall profits from free allowances (windfall profits accrue to higher income deciles but are estimated to be small).
  - Labor costs from pass-back are assumed to affect households uniformly in the model.
- Role of revenue recycling and social policy:
  - Well-designed revenue recycling can make carbon pricing progressive and growth-enhancing.
  - Given the Netherlands’ redistributive transfers, targeted support can mitigate adverse impacts—analysis assumes targeted transfers to the lowest income quintile in recognition that about 7 percent are energy poor.
  - The design and targeting of support (cash transfers vs other mechanisms) materially influence net distributional outcomes.

### Scenario-specific quantitative impacts
- Baseline overall consumption impact across income groups: around 0.3 percent of household purchasing power.
- Expanded CBAM Scenario (CBAM covers all ETS sectors by 2030; free allowances phased out by 2034):
  - Allows higher passthrough, increasing consumption-channel impact, averaging 0.5 percent of household spending.
  - With 8 percent of ETS revenue used to compensate vulnerable households, support would nearly offset the negative impact for the two lowest income deciles.
- CO2e Price Increase Scenario (allowance price rises to €100 per ton in 2030 alongside expanded CBAM):
  - Raising the allowance price roughly doubles the consumption-channel impact versus baseline; average burden on household consumption rises to 0.9 percent of household spending.
  - With 8 percent of ETS revenues used to compensate lower income households, the first two deciles are partially protected.
  - Aggregated distribution follows a U-shaped pattern: higher-income households benefit more from windfall profits, lower-income households are partially protected by transfers, leaving middle-income households more affected.
- ETS2 Scenario (EU ETS expanded to cover transport and buildings):
  - Negative impact on household consumption increases to an average of 1.9 percent.
  - The 1 percentage point increase compared to Scenario 3 is primarily driven by direct effects as ETS2 covers gasoline, diesel and natural gas used for residential heating.
  - Revenues to protect vulnerable households increase via operationalization of the Social Climate Fund, but model estimates suggest additional support would still be required to offset losses for the two most vulnerable deciles.
- Consumption-channel average impacts by scenario (preserved):
  - Expanded CBAM: 0.5 percent of household spending.
  - CO2e price increase to €100 per ton by 2030: 0.9 percent of household spending.
  - ETS2 (expanded coverage to transport and buildings): 1.9 percent of household spending.
- Allowance price modeled in Scenario 3: €100 per ton in 2030 (the allowance price increase modeled is €35 more vis a vis the baseline scenario).
- EU ETS II price assumed in road transport analysis: EUR 55 after 2030 (in line with PBL 2025).

### Road transport electrification — economic, fiscal, and power-sector impacts
- Fiscal revenue trajectory:
  - Revenue from taxes on vehicles, electricity, and fuel projected to remain at around 1.5 percent of GDP in 2027 due to EU ETS II introduction (raising 0.2 percent of GDP) and removal of temporary fuel excise reductions (0.05 percent of GDP).
  - Long-term structural decline in revenue expected as ICEV fuel economy improves and EVs increase market share.
- Emissions and electricity demand:
  - Road transport emissions fall by 15 percent by 2030 and 35 percent by 2035 relative to current levels, but still exceed sectoral targets (road transport CO2 emissions projected to exceed the sectoral target by around 10 percent under existing policies).
  - EV electricity demand reaches 10 TWh by 2030 and 20 TWh by 2035, compared to current demand across all sectors of 110 TWh.
- Welfare and congestion:
  - Policies generate net welfare gains of 0.5 percent of GDP in 2024; gains erode over the next decade due to worsening congestion as EVs are driven more than ICEVs.
- Technical parameters preserved exactly:
  - EVs require around three times less energy to travel one kilometer than ICEVs.
  - Gasoline and diesel excises are €0.79 and €0.52 per liter, respectively.
  - Electricity excises for households and industry are €-0.086 and €0.03 per kWh, respectively.
  - Private Motor Vehicle and Motorcycle Tax (BPM): €600 plus a variable rate; EV exemption removed in 2025.
  - Motor Vehicle Tax (MRB): ~€400 for petrol and EVs and ~€800 and increases with vehicle weight; 75% discount for EVs starting in 2025, declining to 0% in 2030.
  - VAT: 21 percent on gasoline, diesel, and electricity.
  - Heavy goods fixed payment and distance tax: €191–€2,404 annually in 2025 depending on emissions class and axles; transitioning to distance-based charge in 2026 (shadow price of EUR 175 per ton of CO2).
  - Passenger vehicle standards: 95 g of CO2 per km (2020–2024), 93.6 (2025–2029), 49.5 (2030–2034), and all zero-emission after 2034 for passenger vehicles.

### Road policy options, fiscal and emissions outcomes
- Six analyzed road transportation policy options (values preserved):
  - 1. EV-only RUC: RUC of €0.04 per kilometer for passenger EVs only.
  - 2. EV-only RUC with subsidy: RUC €0.04 per km for passenger EVs only with subsidy of €400 per ton (~€4,000 per EV in 2026, declining to €2,400 in 2030 and €720 in 2035).
  - 3. All RUC: RUC of €0.04 per km for all passenger vehicles.
  - 4. EV-only RUC and higher excise: RUC €0.04 per km for passenger EVs only; diesel and gasoline excises increase to efficient levels of €2.14 and 1.43 for gasoline and diesel, respectively, in 2030.
  - 5. Increased heavy goods RUC and policy 2: RUC €0.04 per km for all passenger vehicles with a €360 per ton of CO2 RUC for heavy goods.
  - 6. All RUC with congestion pricing: RUC €0.025 per km for all passenger vehicles and congestion pricing during peak hours in cities of €0.13 per km.
- Fiscal impacts and revenues:
  - Evaluated policies can generate up to 0.4 percent of GDP in additional fiscal revenues in 2030.
  - EV road user charges of €0.04 per km lead to the smallest increase in revenue (0.15 percent of GDP or no change when combined with EV subsidies).
  - Congestion pricing raises around 0.2 percent of GDP in revenue.
  - The fiscal cost of EV subsidies in policy 2 is around 0.15 percent of GDP.
- Emissions and welfare outcomes:
  - EV-only RUC increases the relative cost of EVs, reducing EV shares of sales by 11 percentage points in 2030 and increasing emissions by three percent.
  - RUCs applied to all passenger vehicles (policy 3) achieve targets as emissions fall due to reduced driving of ICEVs.
  - Increasing fuel excises to efficient levels (policy 4) results in slightly greater emissions reductions than applying a RUC to ICEVs.
  - Higher heavy goods RUC (policy 5) slightly reduces emissions without cross-border leakage risk.
  - Congestion pricing (policy 6) achieves the greatest welfare benefit (0.7 percent of GDP) and large emissions decline.
  - Evaluated policies can increase welfare by up to €11 billion in 2030 (0.7 percent of GDP) above current policies; EV-only RUC yields ~0.25 percent of GDP welfare gain.
  - Under all policies, reduced EV driving due to the RUC and/or congestion pricing reduces electricity demand by 2–3 percentage points relative to current national demand.

### Total cost of ownership and distributional considerations for road policies
- TCO effects:
  - The total cost of vehicle ownership (TCO) increases under all proposed policies.
  - The TCO increases by about €8,000 with a RUC of €0.04 per km or excises at efficient levels.
  - Purchase costs make up around 60 percent of the TCO; fuel and other costs around 20 percent each.
- Distributional implications and compensatory options:
  - Distortions will be higher for some households and firms and lower for others; a comprehensive pre-reform distributional analysis is recommended.
  - Redistribution of a portion of expected gains to vulnerable households and firms, careful communication, and phase-in can support political acceptability and equity.
  - Examples of compensatory measures: investments (or higher subsidies) in locations that lack charging stations and higher EV subsidies for poor or rural households.

### Policy implications, recommendations, and trade-offs
- Mitigation and acceptability:
  - To maintain public acceptability, the government needs mitigating policies that address adverse distributional outcomes if they materialize.
- Sectoral and fiscal considerations:
  - Electrification of transport raises fiscal concerns as vehicle and fuel tax revenues (around 1.5 percent of GDP) are projected to nearly halve by 2035, creating fiscal pressure to preserve revenues for infrastructure and congestion management.
  - Power sector implications include a projected nine percent nationwide increase in demand by 2030 from EVs alone—requiring grid planning and management.
- Recommended policy toolkit (identified as promising options):
  - Road user charges, potentially coupled with fuel tax increases.
  - EV subsidies (targeted to distributional objectives).
  - Congestion pricing to address non-climate externalities.
  - Careful consideration of revenue recycling options consistent with Dutch budgetary rules (avoid earmarking; increased fiscal space could be used to support vulnerable households or other productive activities).
- Social Climate Fund and national plans:
  - The SCF will require Member States to develop National Social Climate Plans including energy efficiency, building renovations, low-emission mobility, and measures to reduce energy poverty; temporary direct income support allowed while structural measures are developed.
- Cash transfer design notes:
  - Cash transfers are modeled as a temporary tool in Social Climate Plans to avoid added complexity in the social protection system.
  - Using payroll tax reductions would increase labor supply and offset inflationary impacts but would be mildly regressive (top quintile benefits most).
  - Investing in energy-efficiency programs (e.g., expanding Energiesprong to private households) would permanently increase energy efficiency and relieve grid pressures but entail higher capital cost per retrofitted house versus cash transfers.

### Assumptions, caveats, and limitations
- Modeled impacts are upper-bound estimates; do not capture deep structural transformation or longer-term adaptation behavior.
- Analysis uses 2015 HBS microdata; more recent household consumption patterns could refine results.
- Pass-through and pass-back treatment could be improved by incorporating sectoral market concentration, distinctions between white- and blue-collar workers, and more granular wage stickiness data.
- If CBAM scope is not extended in 2030, passthrough and pass-back dynamics will differ for non-covered goods, reducing consumption-channel impacts but sustaining pass-back harms for those goods.

*Source: IMF staff analysis in "2. Distributional Impacts Across Scenarios" from the Netherlands Selected Issues Paper (June 30, 2025).*

### 2.   Distributional Impacts Across Scenarios _______________________________________________ 10

### 2.   Distributional Impacts Across Scenarios

### Introduction and Context
- Purpose: Assess distributional impacts of imminent EU climate policy changes—the phase-out of free allowances, implementation/expansion of CBAM, rising ETS permit prices, and introduction of ETS2—and implications for the Netherlands’ acceptability of reforms.
- Key contextual numeric points:
  - Additional revenue from EU ETS reforms: 0.7 percent of GDP in 2030.
  - Projected effect on purchasing power: 1.9 percent decrease in purchasing power in 2030.
  - Current vehicle-related taxes raise around 1.5 percent of GDP and are projected to nearly halve by 2035.
  - Projected nationwide electricity demand increase due to EVs: a nine percent increase by 2030.
  - EU ETS target: reduce GHG emissions by 62 percent by 2030 relative to 2005.
  - 2024 average EU allowance price: €65 per metric ton.
  - Expected ETS allowance prices by 2030: nearly €150 per metric ton (examples: €149 and €135 forecasts cited).
  - Scenario CO2e price assumption: €100 per ton of CO2e by 2030 (modeled scenario).

### Major Policy Changes and Timing
- CBAM and free allowances:
  - CBAM transitional reporting phase ends end-2025; full CBAM implementation (importers purchase/surrender certificates) begins in 2026.
  - Free allowances phased out from 2026 to 2034.
  - Potential CBAM scope expansion to all ETS sectors by 2030.
- ETS2 (transport and buildings):
  - ETS2 aims to reduce emissions from fuels used in buildings and road transport by 42 percent by 2030 relative to 2005.
  - Allowance trading under ETS2 expected to begin in 2027.
  - Social Climate Fund (SCF) to support fair transition; goal to mobilize at least €86.7 billion from 2026 to 2032; Member States must co-finance 25 percent of activities in National Social Climate Plans.

### Methodology Overview
- Scenarios modeled (additive):
  - Baseline scenario: current EU ETS at €65 per ton CO2e.
  - Expanded CBAM scenario: expanded CBAM by 2030 covering all ETS products.
  - CO2e price increase scenario: existing ETS + expanded CBAM + price increase to €100 per ton CO2e by 2030.
  - ETS2 scenario: adds coverage of transport and buildings (ETS2) to the above.
- Transmission channels analyzed:
  - Consumption channel: household spending on fuels and goods (Netherlands Household Budget Survey 2015).
  - Sectoral pass-through: sector-specific passthrough of carbon costs into consumer prices (GTAP IO matrix used to estimate embedded emissions).
  - Pass-back: firm responses when costs are not passed onto prices (reducing wages, employment, or profits), depending on trade intensity and income composition across deciles.
  - Free allowances: where free allocations plus price passthrough create windfall profits accruing to capital owners (benefitting higher-income households).
- Revenue recycling assumption:
  - Assume 8 percent of ETS revenues are allocated to targeted cash transfers for vulnerable households.
  - Assume Dutch share of SCF spending increases targeted cash transfers by an amount equal to its share of the SCF per EU guidelines.
- Data and limits:
  - Consumption microdata from European Household Budget Survey for the Netherlands, 2015.
  - Results represent upper-bound estimates; do not account for long-run structural transformation.

### Key Quantitative Findings (modeled/assumed figures preserved)
- EU ETS and carbon pricing:
  - 2024 average allowance price: €65 per metric ton.
  - Price trajectory expected to rise to nearly €150 per metric ton by 2030 (examples cited: Bloomberg NEF €149 per metric ton; Morgan Stanley €135 per metric ton).
  - Modeled CO2e price in scenario: €100 per ton of CO2e by 2030.
- Social and fiscal measures:
  - SCF mobilization target: at least €86.7 billion from 2026 to 2032.
  - SCF Member State co-financing requirement: 25 percent.
  - Temporary lump-sum transfer example: €380 per household (Nov–Dec support referenced).
  - Electricity price cap example: €0.40 per kWh up to an annual use of 2900 kWh.
  - Gas price cap example: €1.45 per m³ up to an annual use of 1200 m³.
  - Share of population in energy poverty: around 7 percent.
  - Assumed share of ETS revenues allocated to targeted transfers: 8 percent.
  - Dutch average tax rate across deciles (pre-transfers): approximately 45 percent to 48 percent of pre-tax income.
  - Benefit rate: reaches 85 percent for the poorest decile and around 5 percent for the richest.

### Distributional Impact Findings and Channels
- Aggregate impacts and channels:
  - Impacts operate through consumption-price channels, passthrough, pass-back, and free allowances.
  - Under baseline and modeled scenarios, effects via consumption are broadly homogeneous across income deciles and urban/rural households.
  - Implementation of CBAM and elimination of free allowances alter distributional patterns by increasing passthrough and thereby shifting incidence.
  - Where firms can fully pass through ETS costs (assumed once CBAM is implemented), pass-back effects are reduced but windfall profits from free allowances disproportionately benefit high-income households (capital owners).
- Role of revenue recycling and social policy:
  - Well-designed revenue recycling can make carbon pricing progressive and growth-enhancing.
  - Given the Netherlands’ redistributive transfers, targeted support can mitigate adverse impacts—analysis assumes targeted transfers to the lowest income quintile in recognition that about 7 percent are energy poor.
  - The design and targeting of support (cash transfers vs other mechanisms) materially influence net distributional outcomes.

### Policy Implications and Recommendations
- Mitigation and acceptability:
  - To maintain public acceptability, the government needs mitigating policies that address adverse distributional outcomes if they materialize.
- Sectoral and fiscal considerations:
  - Electrification of transport raises fiscal concerns as vehicle and fuel tax revenues (around 1.5 percent of GDP) are projected to nearly halve by 2035, creating fiscal pressure to preserve revenues for infrastructure and congestion management.
  - Power sector implications include a projected nine percent nationwide increase in demand by 2030 from EVs alone—requiring grid planning and management.
- Recommended policy toolkit (identified as promising options):
  - Road user charges, potentially coupled with fuel tax increases.
  - EV subsidies (targeted to distributional objectives).
  - Congestion pricing to address non-climate externalities.
  - Careful consideration of revenue recycling options consistent with Dutch budgetary rules (avoid earmarking; increased fiscal space could be used to support vulnerable households or other productive activities).
- Social Climate Fund and national plans:
  - The SCF will require Member States to develop National Social Climate Plans including energy efficiency, building renovations, low-emission mobility, and measures to reduce energy poverty; temporary direct income support allowed while structural measures are developed.

### Assumptions, Caveats, and Limitations
- Modeled impacts are upper-bound estimates; do not capture deep structural transformation or longer-term adaptation behavior.
- Analysis uses 2015 HBS microdata; more recent household consumption patterns could refine results.
- Pass-through and pass-back treatment could be improved by incorporating sectoral market concentration, distinctions between white- and blue-collar workers, and more granular wage stickiness data.
- If CBAM scope is not extended in 2030, passthrough and pass-back dynamics will differ for non-covered goods, reducing consumption-channel impacts but sustaining pass-back harms for those goods.

*Source: IMF staff analysis in "2. Distributional Impacts Across Scenarios" from the Netherlands Selected Issues Paper (June 30, 2025).*

### 18.      The reduction in household purchasing power from the EU ETS currently in place is

### 18.      The reduction in household purchasing power from the EU ETS currently in place is 

### Consumption-channel impacts
- Direct (fuel) vs indirect (embedded emissions) effects offset each other, producing a broadly uniform impact across income groups when considering only the consumption channel.
- Key exact consumption shares and comparisons:
  - Lower-income households spend about 9 percent of their budget on fuels (direct effect) versus 7.5 percent for higher income households.
  - Low-income rural household in the 75th percentile: about 12.5 percent of total consumption on fuels.
  - Similarly placed urban household: 10.6 percent.
  - High-income urban household: around 7.3 percent.
- Overall impact when both direct and indirect consumption channels are considered: around 0.3 percent of household’s purchasing power across income groups and types of households.

### Pass-back and progressivity
- Imperfect pass-through (pass-back) makes the distributional impact more progressive because higher-income households bear greater losses via reduced capital income concentrated at the top.
- Exact estimated distribution of profit losses due to pass-back:
  - 37 percent of total profit losses fall on the top income decile.
  - 23 percent fall on the ninth decile.
- Profit losses from pass-back are estimated to be higher than windfall profits from free allowances (windfall profits accrue to higher income deciles but are estimated to be small).
- Labor costs from pass-back are assumed to affect households uniformly in the model.

### Compensatory transfers
- Model assumption based on European average: 8 percent of EU ETS revenues in the Netherlands are used to compensate households via cash transfers.
- Transfers are modeled as targeted towards the two more vulnerable deciles.
- Under the baseline with 8 percent transfers, compensatory cash transfers would not fully offset the negative impact of the ETS for the two most vulnerable income deciles.

### Scenarios modeled and their distributional impacts
- Expanded CBAM Scenario (CBAM covering all ETS-covered sectors by 2030; free allowances not fully phased out until 2034):
  - Allows higher passthrough, increasing consumption-channel impact, averaging 0.5 percent of household spending.
  - Higher passthrough eliminates negative impacts of pass-back and opens space for windfall profits in sectors that receive free allowances.
  - Windfall profits equal the value of the allowance net of the average corporate income tax, disproportionately benefiting higher-income households due to concentrated capital ownership.
  - With 8 percent of ETS revenue used to compensate vulnerable households, support would nearly offset the negative impact for the two lowest income deciles.

- CO2e Price Increase Scenario (allowance price rises to €100 per ton in 2030 alongside expanded CBAM):
  - Raising the allowance price roughly doubles the consumption-channel impact versus baseline; average burden on household consumption rises to 0.9 percent of household spending.
  - In this scenario 8 percent of ETS revenues are used to compensate lower income households, partially protecting the first two deciles.
  - Aggregated distribution follows a U-shaped pattern: higher-income households benefit more from windfall profits, lower-income households are partially protected by transfers, leaving middle-income households more affected.

- ETS2 Scenario (EU ETS expanded to cover transport and buildings, including residential, road, rail, domestic shipping):
  - Negative impact on household consumption increases to an average of 1.9 percent.
  - The 1 percentage point increase compared to Scenario 3 is primarily driven by direct effects as ETS2 covers gasoline, diesel and natural gas used for residential heating.
  - Revenues to protect vulnerable households increase via operationalization of the Social Climate Fund, but model estimates suggest additional support would still be required to offset losses for the two most vulnerable deciles.

### Key statistics and scenario mechanics (preserve exact values)
- Baseline overall consumption impact across income groups: around 0.3 percent of household purchasing power.
- Profit-loss distribution from pass-back: 37 percent (top decile); 23 percent (ninth decile).
- Share of ETS revenues modeled for household compensation: 8 percent.
- Consumption-channel average impacts by scenario:
  - Expanded CBAM: 0.5 percent of household spending.
  - CO2e price increase to €100 per ton by 2030: 0.9 percent of household spending.
  - ETS2 (expanded coverage to transport and buildings): 1.9 percent of household spending.
- Allowance price modeled in Scenario 3: €100 per ton in 2030 (the allowance price increase modeled is €35 more vis a vis the baseline scenario).
- EU ETS II price assumed in road transport analysis: EUR 55 after 2030 (in line with PBL 2025).

### Road transport electrification — economic, fiscal, and power-sector impacts
- Fiscal revenue trajectory:
  - Revenue from taxes on vehicles, electricity, and fuel projected to remain at around 1.5 percent of GDP in 2027 due to EU ETS II introduction (raising 0.2 percent of GDP) and removal of temporary fuel excise reductions (0.05 percent of GDP).
  - Long-term structural decline in revenue is expected as ICEV fuel economy improves and EVs (relatively lightly taxed) increase market share.
- Emissions and electricity demand:
  - Road transport emissions fall by 15 percent by 2030 and 35 percent by 2035 relative to current levels, but still exceed sectoral targets (road transport CO2 emissions projected to exceed the sectoral target by around 10 percent under existing policies).
  - EV electricity demand reaches 10 TWh by 2030 and 20 TWh by 2035, compared to current demand across all sectors of 110 TWh.
- Welfare and congestion:
  - Policies generate net welfare gains of 0.5 percent of GDP in 2024; gains erode over the next decade due to worsening congestion as EVs are driven more than ICEVs.
- Policy interactions and model specifics:
  - The sector model disaggregates light-duty and heavy-duty vehicles, used vs new vehicles, and ICEVs vs EVs to capture policy and economic heterogeneity.
  - EVs require around three times less energy to travel one kilometer than ICEVs.
  - Electricity excises are relatively low versus fossil fuel excises; gasoline and diesel excises are €0.79 and €0.52 per liter, respectively; electricity excises for households and industry are €-0.086 and €0.03 per kWh, respectively.
  - Other road policy parameters preserved exactly from source (examples):
    - Private Motor Vehicle and Motorcycle Tax (BPM): €600 plus a variable rate; EV exemption removed in 2025.
    - Motor Vehicle Tax (MRB): ~€400 for petrol and EVs and ~€800 and increases with vehicle weight; 75% discount for EVs starting in 2025, declining to 0% in 2030.
    - VAT: 21 percent on gasoline, diesel, and electricity.
    - Heavy goods fixed payment and distance tax: €191–€2,404 annually in 2025 depending on emissions class and axles; transitioning to distance-based charge in 2026 (shadow price of EUR 175 per ton of CO2).
    - Passenger vehicle standards: 95 g of CO2 per km (2020–2024), 93.6 (2025–2029), 49.5 (2030–2034), and all zero-emission after 2034 for passenger vehicles.

### Policy implications and key takeaways
- Multiple transmission channels (direct consumption, indirect consumption, pass-through/pass-back, windfall profits, compensatory transfers) must be accounted for to assess net distributional impacts of carbon pricing.
- Across baseline and modeled scenarios, impacts on consumption rise as passthrough, prices, or coverage expand—from 0.3 to 2 percent of household expenditure—while direct and indirect consumption effects remain broadly uniform across deciles.
- Baseline limited passthrough yields a progressive outcome via cost pass-back; increased passthrough (e.g., via CBAM) enables windfall profits for owners of capital and shifts outcomes toward regressivity.
- Cash transfers are a modeled policy tool to protect vulnerable households, but:
  - Cash transfers should be considered temporary in Social Climate Plans to avoid added complexity in the social protection system.
  - Using payroll tax reductions would increase labor supply and offset inflationary impacts but would be mildly regressive (top quintile benefits most).
  - Investing in energy-efficiency programs (e.g., expanding Energiesprong to private households) would permanently increase energy efficiency and relieve grid pressures but entail higher capital cost per retrofitted house versus cash transfers.
- The high trade intensity of goods and concentration of capital ownership among higher income deciles in the Netherlands imply that pass-backs mainly impact higher income deciles; windfall profits arising from free allowances raise questions about the need for additional compensation for lower-income groups until free allowances are phased out.

*Source: IMF Staff using CPAT.*

### 32.      A policy package can be designed to meet climate targets while reversing adverse

### 32.      A policy package can be designed to meet climate targets while reversing adverse fiscal, power sector, and congestion impacts

### Policy design principles and instruments
- Road user charges (RUC), which charge drivers per kilometer travelled, provide a revenue source that is resilient to electrification and more efficiently regulate driving related externalities.
- RUCs can be applied to EVs in isolation or to all vehicles; ideally RUCs are combined with congestion pricing in cities to directly address urban, peak hours congestion and lower the economywide RUC needed to address non-urban congestion.
- Planned increases to fuel excises and the EU ETS2 adequately price pollution related externalities, but in the absence of RUCs and congestion pricing, higher charges on diesel and gasoline are needed to address congestion from passenger ICEVs.
- An EV-only RUC without corresponding increases in fuel taxes encourages switching to ICEVs; it could be coupled with an EV subsidy that, ideally, declines as the fleet electrifies and EV costs fall.
- A higher RUC on emitting heavy goods vehicles would promote further decarbonization and more closely align with the Eurovignette in nearby countries (e.g., Germany, Denmark).

### Six analyzed road transportation policy options (Table 2 and Table 3)
- 1. EV-only RUC
  - RUC of €0.04 per kilometer for passenger EVs only; €0.04 per kilometer is a similar rate to existing diesel and gasoline fuel excises.
- 2. EV-only RUC with subsidy
  - RUC of €0.04 per kilometer for passenger EVs only with subsidy of €400 per ton (~€4,000 per EV in 2026, declining to €2,400 in 2030 and €720 in 2035).
- 3. All RUC
  - RUC of €0.04 per kilometer for all passenger vehicles.
- 4. EV-only RUC and higher excise
  - RUC of €0.04 per kilometer for passenger EVs only; diesel and gasoline excises increase to efficient levels of €2.14 and 1.43 for gasoline and diesel, respectively, in 2030.
- 5. Increased heavy goods RUC and policy 2
  - RUC of €0.04 per kilometer for all passenger vehicles with a €360 per ton of CO2 RUC for heavy goods.
- 6. All RUC with congestion pricing
  - RUC of €0.025 per kilometer for all passenger vehicles and congestion pricing during peak hours in cities of €0.13 per kilometer.
- Note: In all proposed cases, EU level policies are maintained and existing domestic policies (vehicle ownership and registration taxes, energy taxes) are maintained. All monetary values are in constant 2024 US dollars.

### Fiscal impacts and revenues
- The evaluated policies can generate up to 0.4 percent of GDP in additional fiscal revenues in 2030.
- EV road user charges of €0.04 per km lead to the smallest increase in revenue (0.15 percent of GDP or no change when combined with EV subsidies) as EVs make up only a modest share of vehicles (~35 percent in 2030).
- Policies that additionally apply RUCs to ICEVs or increase fuel excises offer more resilient and larger fiscal revenue.
- Congestion pricing raises around 0.2 percent of GDP in revenue; this revenue may accrue to municipal governments and at least a portion is likely needed to improve public transport for efficiency and acceptability reasons.
- The fiscal cost of EV subsidies in policy 2 is around 0.15 percent of GDP.
- Over the long-term, unless tax rates continue to increase, revenue (as a share of GDP) under all policy options slowly declines as driving levels increase at a slower rate than GDP.

### Emissions outcomes and meeting targets
- The EV-only RUC increases the relative cost of EVs, reducing EV shares of sales by 11 percentage points in 2030 and increasing emissions by three percent.
- Emissions still exceed targets when the EV-only RUC is combined with a sizable EV subsidy (€4,000 in 2025), highlighting the need for policies that reduce driving levels of ICEVs in addition to electrification.
- RUCs applied to all passenger vehicles (policy 3) achieve targets as emissions fall due to reduced driving of ICEVs.
- Increasing fuel excises to efficient levels (policy 4) results in slightly greater emissions reductions than applying a RUC to ICEVs, although this could lead to increased fueling in neighboring countries (which is not an issue under the RUC).
- The higher RUC on emitting heavy goods vehicles (policy 5) slightly reduces emissions without the risk of cross-border leakage.
- Well-designed congestion pricing (policy 6) is extremely effective in reducing driving in congested areas, leading to a large decline in emissions even though the RUCs in non-congested areas are lower than under other policies.
- Note: It is assumed that drivers do not increase driving in non-congested areas and times to avoid the congestion charge; if they do, emissions reductions would be smaller and fiscal revenue higher.

### Welfare, electricity demand, and energy system effects
- The evaluated policies can increase welfare by up to €11 billion in 2030 (0.7 percent of GDP) above current policies and reduce strain on the electricity grid.
- Under the EV-only RUC, congestion caused by EVs declines and economic distortions are marginal resulting in welfare gains of around 0.25 percent of GDP—these gains are offset by the distortions caused by EV subsidies (policy 2).
- Policies with RUCs applied to all vehicles or higher fuel excises (policies 3–5) lead to greater reductions in congestion, local air pollution and climate damages, which more than offset larger economic distortion.
- Congestion pricing achieves the greatest welfare benefit by a large margin (0.7 percent of GDP) due to its efficiency in reducing congestion.
- Under all policies, reduced EV driving due to the RUC and/or congestion pricing reduces electricity demand by 2–3 percentage points relative to current national demand.

### Total cost of ownership (TCO) and distributional implications
- The total cost of vehicle ownership (TCO) over the vehicle’s lifecycle increases under all proposed policies.
- The TCO increases by about €8,000 with a RUC of €0.04 per km or excises at efficient levels.
- Purchase costs still dominate overall expenses, making up around 60 percent of the TCO compared to about 20 percent each for fuel and other costs (mainly maintenance and insurance).
- Distributional impacts require detailed analysis: distortions will be higher for some households and firms and lower for others.
- Prior to any reform, a comprehensive analysis of distributional impacts should be undertaken so they may be proactively managed.
- Redistribution of a portion of expected gains to vulnerable households and firms made worse off, accompanied by careful communication and phase-in of the reform, can support political acceptability and equity.
- Examples of compensatory measures: investments (or higher subsidies) in locations that lack charging stations and higher EV subsidies for poor or rural households.

### Annex I — Methodology to estimate distributional impacts (summary)
- Distributional impacts of the ETS depend on allocation of free allowances and the degree firms can pass on price increases to consumers.
- Windfall profits (market value of the permit price minus corporate income tax) benefit capital owners concentrated in higher income deciles; windfall profits are assumed to benefit each decile according to their share of capital ownership.
- If firms cannot increase prices, they may reduce profits, wages, employment, or a combination, affecting distributional outcomes.
- The methodology uses the household budget survey and input-output matrix for the Netherlands to estimate distributional impacts; passthrough is modeled as inversely correlated with trade exposure ((Exports + Imports) / Output).
- CBAM is modeled as a shock to passthrough: CBAM-covered sectors experience full passthrough, increasing firms’ ability to pass costs to consumers.

### Key quantified policy parameters and outcomes (preserved as in source)
- RUC levels:
  - €0.04 per km for EV-only or all passenger vehicles (various policies).
  - €0.025 per km for all passenger vehicles in policy 6, plus congestion pricing of €0.13 per km in cities during peak hours.
- Heavy goods CO2 RUC:
  - €360 per ton of CO2 in policy 5.
- Fuel excise efficient levels in 2030:
  - Diesel: €2.14 per liter.
  - Gasoline: €1.43 per liter.
- EV subsidy in policy 2:
  - €400 per ton of CO2 (~€4,000 per EV in 2026, declining to €2,400 in 2030 and €720 in 2035).
- Fiscal and welfare figures:
  - Up to 0.4 percent of GDP additional revenue in 2030.
  - EV RUC revenue: 0.15 percent of GDP (or no change when combined with EV subsidies).
  - Congestion pricing revenue: around 0.2 percent of GDP.
  - EV subsidy fiscal cost (policy 2): around 0.15 percent of GDP.
  - Welfare gains up to €11 billion in 2030 (0.7 percent of GDP); EV-only RUC yields ~0.25 percent of GDP welfare gain.
- Vehicle stock and sales:
  - EVs make up ~35 percent of vehicles in 2030 absent policy changes.
  - EV-only RUC reduces EV shares of sales by 11 percentage points in 2030.
- Emissions:
  - EV-only RUC increases emissions by three percent relative to baseline.
- Electricity demand:
  - Reduced EV driving under all policies lowers electricity demand by 2–3 percentage points relative to current national demand.
- Total cost of ownership:
  - TCO increases by about €8,000 under key RUC or excise policies.
  - TCO composition: purchase costs ~60 percent, fuel ~20 percent, other costs ~20 percent.

*Source: IMF staff.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025147.pdf_