How Europe Can Make Carbon Pricing Policies Less Regressive

IMF Blog, September 26, 2024

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Poor households in Germany and France pay up to $2 more per ton of emitted carbon dioxide than their higher-income compatriots.
The average highest-income household in Europe paid about $10.75 per ton of carbon dioxide in 2020.
The lowest-income households pay on average $1.25 more per ton than the highest-income households.
The gap rises to $1.75 and $2 in countries such as Germany and France, and $5 in Bulgaria.
Carbon pricing is regressive when products and services that wealthier people are likelier to consume—such as imported goods and travel outside the European Union—are exempt from carbon pricing, causing poorer households to pay proportionally more as a share of their income.

Equalizing carbon prices across countries would spread the economic burden of emission reductions more evenly across households and alleviate the weight on poorer Europeans.
Uniform carbon pricing would be economically more efficient because:
- It would ensure that cheaper emissions reduction options are implemented first, lowering the cost of achieving European countries’ emission targets.
- It would distribute the cost of emissions reduction across firms, sectors, and countries.
A global price would be most effective in raising carbon pricing embedded in EU households’ imports, addressing regressivity arising from untaxed imported consumption.
Because EU economies will likely remain more open (on average) and apply higher carbon prices than their trade partners, revenues from pricing domestic carbon emissions will continue to exceed the carbon pricing costs embodied in European household consumption bundles. This revenue position should allow the burden of carbon pricing on lower-income households to be eased.

Correct the distortion by equalizing carbon prices across countries to reduce regressivity within and across EU countries.
Consider the IMF’s carbon price floor proposal as a possible alternative to promote economic efficiency while addressing cross-country burden differences.
Extend carbon pricing to currently exempt sectors, including road transport and heating fuels, to make carbon pricing less regressive.
Use revenues from domestic carbon pricing—which are expected to exceed the carbon pricing costs embodied in household consumption bundles—to ease the burden on lower-income households.

Geoffroy Dolphin and Magnus Merkle, September 26, 2024 — IMF Blog