Who pays for higher carbon prices?: Illustration for Lithuania and a research agenda

This paper lays out an approach, and a research agenda, for assessing
the impact of carbon pricing on household budgets, and of possible
compensatory government transfers that can be financed through carbontax revenues. It relies on a rich set of available data and policy models and
combines them in a way that is informative for mapping the gains and
losses at the household level in the short term as countries transition to a
low-carbon economy. A particular focus is on linking information on carbon
emissions and consumption patterns (which is needed for quantifying
carbon-tax burdens), with income data and tax-transfer policy models
(needed for assessing government policies that aim to cushion or offset
carbon-tax burdens). The approach is illustrated for a carbon-tax scenario
based on a recent proposal in Lithuania. Results confirm that direct
burdens from higher fuel prices fall disproportionately on lower-income
households. But indirect effects, from higher prices of goods other than
fuel, are sizeable and broadly “flat” across the income distribution, which
dampens regressivity. Low-income households are also found to respond
more strongly to rising prices, reducing their burdens and, hence,
regressivity. The total effect is only mildly regressive. Recycling carbontax revenues back to households allows considerable scope for avoiding
or cushioning losses for large parts of the population, and existing policy
models can be used to design compensation measures that facilitate
majority support for carbon tax packages.