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Distributional Consequences of Becoming Climate-Neutral
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DOI：10.1093/ej/ueag004.png)
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Abstract
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The EU has embarked on an ambitious path towards climate neutrality. How difficult will this transition be for the population as a whole and for different subsets of consumers? This paper investigates this question using a dynamic general-equilibrium model that captures a key feature of energy consumption: the relative energy content of one's consumption basket falls significantly as a function of one's relative income. Thus, low-income consumers are expected to be hit harder by the higher energy prices that we anticipate over the next few decades. In the model, energy-a complementary input to capital and labour-can be produced either using fossil fuel or a 'green' technology. We represent the EU policy in terms of a tax on fossil fuel and show that the European Commission's Fit-for-55 package implies a 106.4% tax on the fossil-based technology. The output losses from this tax are substantial, and GDP is 6.3% lower in the new steady state. The burden falls primarily on the lowest-income agent, who represents the first income quintile and is 47% more worse off than the highest-income agent, representing the fifth quintile. The output losses can almost be cut in half if the economy achieves a simultaneous increase in energy efficiency, as outlined in the Fit-for-55 package.
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