Addressing the Social Impacts of Carbon Pricing in the EU

Carbon pricing has become a key climate policy tool on a global scale, and global governments implement and use carbon pricing policies to meet more ambitious climate targets. As carbon pricing mechanisms are implemented and refined to better meet environmental objectives, prices have risen, and more sectors of the economy have felt the ensuing impact.

In a new report, Guidehouse experts discuss the potential negative real or perceived distributional effects carbon pricing can have on households, reviewing how jurisdictions that have implemented carbon taxes and emissions trading systems use the ensuing revenues. The report highlights good practice approaches to recycling carbon pricing revenue to address distributional impacts on households and citizens in the European Union (EU) and beyond. 

“Designing a fair and effective carbon pricing policy requires careful consideration of how costs and benefits are distributed across society to achieve immediate political feasibility and durability for carbon pricing policy options over time,” explained Moritz Schäfer, associate director at Guidehouse’s Energy, Sustainability, and Infrastructure segment. 

Although carbon pricing can contribute to abating emissions, it can also have significant negative real or perceived distributional effects for households. Good practices from across the EU and around the globe also show that investments in renewable energy, energy efficiency, clean vehicles and fuels, transportation infrastructure, etc. can both reduce the burden of high energy and fuel costs, especially in low-income groups, and support decarbonization goals in sectors such as transport, cooling, and heating. 

“Learning from good practice approaches across the EU and around the world can offer valuable lessons to help justly and effectively tailor the next phase of EU climate policy,” said Schäfer.

This report was co-authored by Emma Krause and Agustin Roth.