Authors: Dr. Jan Steckel and Leonard Missbach

The Distributional Consequences of Carbon Pricing Across Households

Carbon pricing has garnered increased attention across public debates in Israel, Germany and other European countries, as it is seen as an efficient policy instrument to encourage the reduction of GHG emissions across large parts of the economy. Putting a price on carbon is intended to solve a significant market failure, which occurs when the polluting actors do not pay for the damage caused by the carbon emissions of their economic activities. It works by charging emitters per ton of CO2 emissions for which they are responsible, thus creating an incentive to phase out climate-damaging behaviors and transition to sustainable climate-friendly practices.

While there are various forms of carbon pricing mechanisms, including different mixes of taxes, levies, and emissions trading systems, it is clear that any carbon pricing scheme would also have economic consequences for households. As evidenced by the waves of protests around the world, introducing a carbon price, moreover in times of a global epidemic and economic turmoil, is a highly sensitive and delicate task that needs to be designed in a transparent and inclusive manner that addresses potential adverse economic effects on the population.

Examining multiple Israeli households that reflect different parts of Israeli society, it becomes clear that if a carbon price were to be introduced with no further policy measures, it would have regressive distributional outcomes: In relation to total expenditures, poor households would be more affected than richer ones. In addition, Arab households, rural households and households that own (and use) a car would be affected to a greater extent than other households.

Against this background, the following paper – by Jan Steckel and Leonard Missbach of the Mercator Research Institute on Global Commons and Climate Change (MCC) in Berlin – aims to provide decision makers and experts with tangible findings and insights on which segments of the  population in Israel might be negatively impacted by a carbon pricing reform and help address socially unbalanced outcomes as part of the planning process.

Recommendation

In order to advance a balanced and effective carbon pricing scheme in Israel, one that affords protection for lower-income households, some of the generated revenues can be diverted via redistribution mechanisms in a way that would minimize potential adverse economic effects. As demonstrated by the different redistribution scenarios presented in this paper, lump-sum transfers (diverted from the carbon pricing revenues) could lead to progressive outcomes. In addition, this paper contains information on subsidy schemes, for instance on electricity prices, public transportation and food.

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