The distributional effects of CO2 pricing at home and at the border on German income groups - an overview of the BMBF Rochade project

An overview of the BMBF Rochade project / The distributional effects of CO2 pricing at home and at the border on German income groups

Abstract

The project Rochade, “Mitigation Policies in a Globalized and Developing World: The Role of Structural Change and Distributional Effects” studies distributional effects of climate policies and climate change effects in the agricultural sector. It takes structural change explicitly into account and explores policies to overcome adverse distributional effects. Structural change refers to the transformation process from an agriculture-based economy via an industry- towards a services- and knowledge-based economy. Regional project foci are Germany, India and developing countries. The project is funded by the German Federal Ministry of Education and Research (BMBF) under the funding priority "Economics of Climate Change II" from 2019 until 2022. Project partners are the Potsdam Institute for Climate Impact Research (PIK), the Mercator Research Institute on Global Commons and Climate Change (MCC) in Berlin and the Kiel Institute for the World Economy (IfW).

While climate policy studies are widespread, fully fledged computable general equilibrium (CGE) model analyses of distributional policy effects are rare because the required data and approaches are usually unavailable. To fill this gap, we provide a step-by-step "recipe" for disaggregating a country-specific representative consumer of a CGE model. Using this "recipe", we implement German household survey data in a global CGE model by distinguishing three income groups of the German representative consumer. We find that the negative consumption effect of CO2 pricing is highest for the low-income group, whereas the negative income effect is highest for the high-income group and exceeds the consumption effect. The low-income group benefits most from (per capita-based redistribution of) carbon pricing revenues and receives social transfers such that poor households can be better off with such climate policies than without them. Similarly, CO2 pricing of imports at the EU border strengthens these distributional effects and is mainly beneficial for the low-income group.