Investigating Equity and Efficiency in Carbon Pricing with Revenue Recycling: A Combined Macro- and Micro-Modelling Approach

39 Pages Posted: 3 Dec 2024

See all articles by Claudia Kettner

Claudia Kettner

Austrian Institute of Economic Research

Thomas Leoni

University of Applied Sciences Wiener Neustadt

Judith Köberl

affiliation not provided to SSRN

Dominik Kortschak

affiliation not provided to SSRN

Mark Sommer

affiliation not provided to SSRN

Veronika Kulmer

University of Graz

Abstract

While the potential of carbon pricing to curb CO2 emissions is widely acknowledged, the instrument keeps being disputed due to its potential regressivity and the burden it places on low-income households. Recently also the issue of horizontal inequalities has gained in importance in political and scientific discussions, especially with respect to regional differences in carbon pricing impacts. We link the macroeconomic model DYNK with the microsimulation model EASI_AT to analyze the effects of carbon pricing under various revenue recycling options, focusing on the regional dimension of the distributional effects of carbon pricing policies. This approach allows combining the detailed household representation of the microsimulation approach with information on the macroeconomic feedback effects. Our results confirm that carbon pricing, without revenue recycling, generally places a higher burden on households living in peripheral regions due to their higher dependence on motorized individual transport, larger dwellings, and a higher prevalence of oil heating systems. Lump-sum payments targeted at low incomes significantly improve the situation for peripheral regions, but in all scenarios households living in urban areas benefit more from revenue recycling than the rural population. Ultimately, targeted support (e.g. subsidies for exchanging heating systems) is required to alleviate the burden for low-income households.

Keywords: Carbon pricing, Revenue recycling, distributional impacts, macro-micro-linkage, Austria

Suggested Citation

Kettner, Claudia and Leoni, Thomas and Köberl, Judith and Kortschak, Dominik and Sommer, Mark and Kulmer, Veronika, Investigating Equity and Efficiency in Carbon Pricing with Revenue Recycling: A Combined Macro- and Micro-Modelling Approach. Available at SSRN: https://ssrn.com/abstract=5041870 or http://dx.doi.org/10.2139/ssrn.5041870

Claudia Kettner (Contact Author)

Austrian Institute of Economic Research ( email )

P.O. Box 91
Wien, A-1103
Austria

Thomas Leoni

University of Applied Sciences Wiener Neustadt ( email )

Wiener Neustadt
Austria

Judith Köberl

affiliation not provided to SSRN ( email )

No Address Available

Dominik Kortschak

affiliation not provided to SSRN ( email )

No Address Available

Mark Sommer

affiliation not provided to SSRN ( email )

No Address Available

Veronika Kulmer

University of Graz ( email )

Universitaetsstrasse 15 / FE
A-8010 Graz, 8010
Austria

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