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

Michael Hübler, Malin Wiese, Marius Braun, Johannes Damster - September 28, 2022

While climate policy studies are widespread, fully fledged computable general equilibrium (CGE) model analyses of distributional policy effects are rare because the required data and approaches are usually unavailable. To fill this gap, 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 CO2 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. Similarly, CO2 pricing of imports at the EU border strengthens these distributional effects and is mainly beneficial for the low-income group.