The distributional effects of CO2 pricing at home and at the border on German income groups

Abstract

While climate policy studies are widespread, fully fledged computable general equilibrium (CGE) model analyses of distributional policy effects are challenging because the required data and approaches are not directly available. To ease such distributional analyses, we provide a step-by-step “recipe” for disaggregating a country-specific representative consumer of a CGE model. Using this “recipe”, we implement German household survey data in a global CGE model by distinguishing three income groups of the German representative consumer. We find that the negative consumption effect of CO${}_2$ pricing is highest for the low-income group, whereas the negative income effect is highest for the high-income group and exceeds the consumption effect. The low-income group benefits most from (per capita-based redistribution of) carbon pricing revenues and receives social transfers such that poor households can be better off with such climate policies than without them. CO${}_2$ pricing of imports at the (EU) border slightly strengthens these distributional effects and is mainly beneficial for the low-income group. The geographic extension of emissions trading within a “climate club” leads to substantial efficiency gains that are beneficial for Germany and the EU.