Distributional Consequences of Climate Policies

Policies to support the transition to a carbon-neutral economy are high on the policy agenda. Their effectiveness in reducing carbon emissions and their distributional consequences are actively debated. One key reason for the ongoing debate is that quantitative answers regarding the reduction-redistribution trade-offs of such policies remain limited. Looking at the emissions of household consumption, this paper makes two contributions to the discussion. First, we empirically show that infrequently adjusted consumption goods, i.e. consumption commitment goods such as cars or heating systems, together with their complementary consumption (gas, oil), account for more than 35 percent of household carbon emissions. Second, we develop a quantitative life-cycle model with heterogeneous adoption rates of carbon-neutral commitment goods by income to quantify the reduction-redistribution trade-off of different policy mixes. Our results for the reduction-redistribution trade-off show that a percentage subsidy for carbon-neutral consumption effectively reduces emissions by targeting high-income households. If the subsidy is financed by a progressive income tax, it yields a policy mix that leads to rapid emission reductions and a majority of households supporting its distributional effects.