Carbon neutrality by 2050 is an aspirational EU target that calls for a large-scale restructuring of our societies. If the most vulnerable will bear the largest cost, climate policies will contribute to the steep rise in inequality, which represents another fundamental challenge of our times. The European Energy Crisis in 2022 reminds us that energy price changes, whether caused by external shocks of government policies, have distributional impacts that call for compensation. The European Commission has acknowledged this problem, as demonstrated by the proposed Social Climate Fund. Yet, how much compensation is needed, who needs it the most and how compensation mechanisms should be designed to allocate funds to those most in need is currently poorly understood. This project will try to fill this research gap by studying the distributional impacts of carbon pricing, and how well-designed policies can counter its adverse effects.
Inequality considerations call for a new environmental economic modelling, which trades off efficiency against equity both within and across income groups. The novelty of the approach of GRETA builds on its combination of mechanism design theory and detailed individual-level data. We use mechanism design to derive the optimal green tax reform: A combination of optimal taxation and climate policies calls for a model with two-dimensional private information that is new to the literature. Building on the theory, we study the impacts of the natural experiment provided by the European Energy Crisis of 2022. Our empirical approach builds on a large individual- and firm-level administrative dataset from Finland, allowing us to measure the individuals’ exposure to climate policies through consumption, employment, and firm ownership. In addition, we will run a survey to study the attitudes towards climate-induced inequalities and link the results to the administrative data.
