The global consumer incidence of carbon pricing: evidence from trade
Governments around the world are introducing prices on carbon dioxide (CO2) emissions as a key policy tool in the fight against climate change. Carbon pricing pushes consumers to buy less emissions-intensive goods and producers to use cleaner inputs. But it also has a cost, especially to consumers, in the form of price rises. In this paper, the author uses a novel, global approach to estimate the global distribution – or ‘incidence’ – of that cost to consumers, both between countries and between different income groups within countries.
The author finds that the burden of higher prices caused by carbon pricing falls more on average-income consumers in poor countries than on poor consumers in average-income countries. Therefore some carbon pricing policies may be considered globally regressive unless the revenue is redistributed to account for these costs or unless the benefits of climate change mitigation are considered. The effect is stronger between countries than within any one country.
The results can shed light on who may be prone to resisting climate policy, and inform the design of more equitable global climate policy. Ultimately, the incidence of any tax depends on a multitude of factors, including how the collected revenue is used. Estimating the consumer cost incidence usefully informs how to distribute any revenue that might be generated by carbon pricing.
Key points for decision-makers
- The author estimates the global incidence of higher consumer prices under three carbon pricing scenarios.
- The first scenario is a global uniform carbon price, which the author finds would be highly regressive if the revenue were not recycled towards measures that would benefit the poor.
- The second is the introduction of the EU emissions trading system (ETS) in 2005. This is found likely to have been regressive, largely due to differences between countries, with Eastern European and Baltic States consumers the hardest hit.
- Thirdly, the author investigates complementing the EU ETS with a carbon price on traded goods, through so-called Border Carbon Adjustments (BCA), and finds this would most affect the poorest as well as the richest consumers in the EU. This is the first estimate of the EU-wide consumer incidence of BCA to complement the EU ETS.
- Further analysis could contrast the consumer cost with two important benefits of carbon pricing: redistributing revenue from pricing, which could significantly alleviate the cost for poorer people, and climate change mitigation, which is likely to disproportionately benefit hotter, poorer countries.
- The author concludes that the benefits from mitigating climate change may weaken or reverse the regressive effect on poorer consumers from carbon pricing.
- Overall, the results suggest that the consumer cost of carbon pricing is regressive in some, mostly rich countries and progressive in some poorer ones – but that differences between countries are potentially much more important in shaping the global incidence.