Carbon Pricing and Inequality: A Normative Perspective

Despite broad acceptance among economists, carbon taxes face persistent public resistance. We measure the sources and distribution of welfare losses from unexpected European carbon price changes by estimating their impact on consumer prices, labor income, financial wealth, and government transfers. A 1% carbon-policy-induced increase in energy prices leads to an average welfare loss of about 0.5% of a household’s three-year consumption, primarily driven by indirect labor-income effects. Younger, poorer, and less educated households, especially in Southern and Eastern Europe, bear a disproportionate burden. These findings suggest public opposition to carbon taxes could stem from legitimate distributional concerns.