Inequality along the European green transition
Published: 11 March 2025
By: Guido Ascari Andrea Colciago Timo Haber Stefan Wöhrmüller
The EU aims for 42.5% green energy consumption by 2030. What are the effects of the European green transition on inequality? We answer this question using a heterogeneous-agent model with non-homothetic preferences for energy and non-energy goods, calibrated to European data. We study the impact of an increase in carbon taxes designed to meet the EU target under different revenue-recycling strategies. Redistributing tax revenues via uniform transfers reduces consumption inequality, shifts the welfare burden to high-income households, but leads to significant output losses. Subsidizing green energy producers boosts energy production, reduces output losses, and requires a smaller carbon tax to meet the EU target. However, it increases consumption and income inequality, with the highest welfare costs borne by low-income and asset-poor households. Our findings highlight key trade-offs between equity and efficiency in green transition policies.
Keywords: Green Transition; Inequality; Carbon Pricing830
JEL codes Q43; Q52; E6
Working paper no. 830
830 - Inequality along the European green transition
Research highlights:
- We analyze the overall and distributional impacts of the EU's green transition.
- Specifically, we examine the effects of different uses of carbon tax revenues, including (i) Government spending, (ii) Uniform transfers to households, and (iii) Subsidies for clean energy production
- We develop a general equilibrium model that includes both green and non-green energy producers. The model accounts for the fact that agents with lower income and wealth devote a larger proportion of their total expenditure on energy consumption compared to wealthier individuals.
- Government spending increases consumption inequality, while lump-sum transfers reduce it by redistributing income. Green subsidies have mild negative redistributive effects.
- Policy recommendations depend on the goals of the policymaker, as our findings reveal important trade-offs between equity and efficiency. Lump-sum transfers reduce inequality, while green subsidies support economic stability and lower overall costs.
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