Who pays for higher carbon prices? Mitigating climate change and adverse distributional effects

Carbon pricing incentivises a reduction in emissions and is one of the key climate change mitigation policies. It may raise a number of concerns, however, not least in the context of recent inflation surges and the energy crisis brought about by Russia’s war of aggression against Ukraine. A key concern is that carbon pricing measures may have adverse distributional consequences, which in turn can hinder support for necessary climate change mitigation action. This chapter estimates the carbon content of households’ consumption baskets and examines how higher carbon prices alter household budgets and consumer prices – and therefore the real value of workers’ wages. It examines whether carbon pricing measures are regressive and explores how burdens differ across groups, including disadvantaged ones. Based on the distributional impact and associated carbon price revenues, the chapter considers the scope for offsetting household burdens by channelling revenues back to households in the form of income transfers.