Regressive carbon pricing in the EU

In Germany and France, carbon pricing disproportionately affects low-income households compared to their wealthier counterparts. This disparity arises because products and services commonly consumed by wealthier individuals, like imported goods and travel outside the EU, are exempt from carbon pricing. As a result, poorer households end up paying up to $2 more per ton of emitted carbon dioxide. This phenomenon highlights the regressive nature of carbon pricing, where lower-income groups bear a higher proportion of the cost relative to their income.

Equalising carbon prices across countries, would spread the economic burden of emission reductions more evenly across households and alleviate the weight on poorer Europeans. Making carbon pricing more socially fair improves equity as well as efficiency. Furthermore, cheapest emissions reduction options are used first, lowering the overall cost of meeting emission targets and spreading the burden more evenly across firms, sectors, and countries.

In 2020 Europe, high income vs low income CO₂ payments

• Highest-income households paid about $10.75 per ton of CO₂,

• Lowest-income households paid on average $12 per ton of CO₂,

This gap of $1.25 is even larger in countries like Germany, France ($1.75–$2), and Bulgaria ($5).

EU countries are expected to stay more open and maintain higher carbon prices than their trade partners. As a result, revenue from domestic carbon pricing will likely exceed the carbon costs included in household consumption. This surplus provides an opportunity to reduce the burden of carbon pricing on lower-income households.

Below is a useful mindmap on the advatanges and disadvantages of direct and indirect taxes.

Source: IMF Blog – How Europe Can Make Carbon Pricing Policies Less Regressive

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