Inequality beyond income quantiles: Distributional effects of climate mitigation policies

Abstract

It is argued that the political feasibility of climate mitigation policies depends heavily on their distributional effects. This paper therefore studies the distributional effects of the European Commission's Fit-for-55 package at the household level in seven EU countries, analyzing a carbon tax on transport and heating fuels as well as variations of a lump-sum refund. Based on the resulting income distributions, different inequality measures are computed. The paper aims to extend previous methodological approaches by including inequality measures such as the Theil index and Atkinson index and comparing the results of carbon taxes on transport and heating fuels for seven EU countries in a consistent manner. I find that a household-size specific lump-sum refund not only mitigates the negative distributional effects of a carbon tax but also reduces overall inequality compared to the baseline scenario without a tax.