Distributional effects of carbon pricing when considering household heterogeneity: An EASI application for Austria

This paper studies the distributional impacts of a carbon tax in Austria and explores compensating measures to mitigate negative side effects. We extend previous studies by focussing on household heterogeneity, i.e. how housing attributes and socio-demographics govern a household's vulnerability to energy price increases. We apply the EASI demand system, which captures non-linear Engel curves and heterogeneous preferences; both crucial to estimate energy consumption. By simulating stylised, separate price increases we identify how seemingly overall similar welfare effects differ, depending on the energy good taxed, the region a household lives in, year of construction and household composition. These impact channels, with the severity of impacts differing according to various household characteristics are also reflected by the carbon tax scenario and reveal the importance of targeted support schemes. Although, each of the tested transfer schemes is able to enhance equality and cushion negative welfare effects, transfer schemes focussing on household size or on particular vulnerable population segments show the strongest effects in terms of equality, proportionality of the tax burden and welfare. Consequently, in order to yield a socially fair energy or carbon tax regime, taking household heterogeneity into account is essential.