Carbon Pricing and Redistribution: A Microsimulation Analysis for Belgium
We simulate the distributional effects of a €45/tCO2 carbon price on Belgian households’ heating and transport fuels using microdata from the 2016 Household Budget Survey. Without compensation, the policy is regressive and increases energy poverty, with especially large burdens for singles, seniors, and households heating with oil. We compare three revenue-recycling designs: equal transfers per household, equal transfers per capita, and a fuel-type-differentiated scheme that provides larger supplements to fossil-heated households. Per-household recycling protects vulnerable households better than per-capita recycling, which tends to undercompensate small households. Differentiating transfers by heating fuel further reduces large losses and within-income-group dispersion, and it prevents an increase in energy poverty while preserving overall progressivity of the reform.
Read MoreEnvironmental Engel Curves over four decades – The case of the Republic of Ireland
The relationship between income and carbon dioxide (CO₂) emissions has been debated in the environmental economics literature, primarily through two complementary but conceptually distinct frameworks. At the macro level, the Environmental Kuznets Curve (EKC) hypothesis posits a non-linear relationship between economic development and emissions, whereby emissions initially increase with income growth before stabilising or declining at higher income levels. At the micro level, Environmental Engel Curves (EECs) describe how household-level emissions vary with income within a given country, reflecting differences in consumption patterns, energy use, and access to carbon-intensive goods and services. These two literatures typically developed separately, leaving a gap: we have limited evidence on how the within-country income-emissions relationship evolves as an economy moves along its development path. To our knowledge, only one study examine temporal changes in the distribution of household CO₂ emissions within a single country, notably Sager (2019) for the United States. This paper studies the evolution of Environmental Engel Curves over time using six waves of the Irish Household Budget Survey (HBS) from the early 1980s to 2015, a period during which Ireland experienced exceptionally rapid income growth and major changes in consumption opportunities and energy use. We estimate income-emissions relationship for multiple points along Ireland’s development trajectory and ask: How does the shape of the EEC change as a country transitions from lower- to higher-income status? In doing so, we explicitly separate two mechanisms that are easily confounded in cross-sectional work: (i) changes in the carbon content of given consumption categories (i.e. carbon intensity of heating) and (ii) changes in the prevalence of carbon-intensive durables (i.e. personal vehicles) across the income distribution (extensive margin). We focus, in particular, on direct household energy use, focusing on residential heating fuels and private transport (vehicle ownership), which are plausible channels through which development alters EEC shape. These categories are where diffusion, infrastructure constraints, and policy-induced technology change are most likely to generate non-linearities. By documenting how EECs shift and re-shape across three decades of development within a single country, the paper complements cross-country evidence on heterogeneous distributional incidence (Dorband et al., 2019) and time-series evidence for the United States (Sager, 2019). We show that the EKC can be understood as the outcome of changing Environmental Engel Curves over the development process, driven by the diffusion and saturation of carbon-intensive household technologies. References Dorband, I. I., Jakob, M., Kalkuhl, M., & Steckel, J. C. (2019). Poverty and distributional effects of carbon pricing in low- and middle-income countries – A global comparative analysis. World Development, 115, 246–257. https://doi.org/10.1016/j.worlddev.2018.11.015 Sager, L. (2019). Income inequality and carbon consumption: Evidence from Environmental Engel curves. Energy Economics, 84, 104507. https://doi.org/10.1016/j.eneco.2019.104507
Read MoreHousehold Demand Responses to Carbon Pricing by Energy Poverty Status: Evidence from Belgium
This paper develops a behavioral microsimulation framework to analyse how carbon pricing affects energy vulnerable households in Belgium. We focus on two groups: energy poor (EP) households, who devote a large share of their income to energy, and hidden energy poor (hEP) households, who spend little on energy as they severely restrict their consumption. Using eleven cross-sections of the Belgian Household Budget Survey (2003–2016), we first document structural differences between EP and hEP households with logistic regressions. We then estimate a demographically specified Quadratic Almost Ideal Demand System (Banks et al., 1997) and develop a two-stage residual inclusion procedure to address the endogeneity of energy poverty statuses. The resulting price and income elasticities by vulnerability profiles are used to simulate responses and welfare impacts of a carbon price on heating and transport fuels, consistent with the forthcoming EU ETS 2. Behavioral adjustments are highly heterogeneous: lower-income and energy vulnerable households show higher fuel price elasticities than wealthier groups, with hEP households responding most strongly to price increases. Consequently, EP households face substantial carbon costs but comparatively smaller welfare losses, whereas hEP households suffer disproportionately large welfare losses despite their low expenditure exposure. These results reveal horizontal equity concerns that are invisible in income-based metrics alone and highlight the need to integrate detailed energy vulnerability profiles into carbon pricing design.
Read MoreIncorporating the Prebound Effect in Retrofit Policy Analysis: Distributional Results for Belgium
This paper compares the distributional incidence of three decarbonization instruments in the Belgian residential sector: EPC‑based minimum standards, carbon pricing with an equal per‑household dividend, and renovation subsidies financed by a uniform lump‑sum tax. Using Woonsurvey 2018 and a dwelling‑level microsimulation model that evaluates renovation profitability on observed energy use, we quantify household monetary impacts, renovation take‑up, and equity (across and within income groups) for budget neutral policies calibrated to common C02 targets. Three results stand out. First, EPC standards concentrate burdens on low‑income and low‑use households and generate high dispersion because they compel renovations where realized savings are small. Second, universal subsidies are costly on average and distribute benefits unevenly, with sizable transfers to infra‑marginal projects. Third, carbon pricing with revenue recycling yields the lowest and most evenly distributed household burdens, largely because it triggers heat‑pump adoption in dwellings with the highest energy consumption. We further show that combining a modest carbon price with targeted heat‑pump support can meet the same emissions target at lower cost and with a smaller variance of household impacts than under the carbon dividend. Results are robust to rebound, landlord–tenant limits, and reasonable variations in discounting, horizons, and costs.
Read MoreThe development of an integrated framework combining economic efficiency, social justice, and ecological effectiveness using microsimulation modelling
This research explores how microsimulation modelling can be used to develop an integrated framework that evaluates economic efficiency, social justice, and ecological effectiveness simultaneously.
Read MoreThe direct and indirect effects of green tax reform in Belgium. A micro-macro approach.
Carbon pricing combined with revenue recycling through lower labor income taxation achieves carbon mitigation and a decrease in distortionary labor income tax. However, due to distributional concern, there is large societal opposition towards such reforms. The burden of the carbon price is higher for low-income households due to their higher relative expenditures on carbon-intensive goods, such as heating and transport. Moreover, also indirect effects of the carbon price, e.g. job loss in the economy, are feared to additionally fall on the shoulders of those same households. In this paper we combine a micro- and macroeconomic approach to gauge the distributional direct and indirect impacts of green tax reform. A computable general equilibrium (CGE) model is used to simulate impacts on commodity prices and real wage rates for different types of labor. These impacts are fed to a microsimulation model (MSM) of incomes and expenditures, so that we can gauge the distributional impact of several scenarios in green tax reform. We build on the existing top-down literature, discuss consistency between the two models, the choice of the numéraire and the (implicit) assumption on the uprating of the tax schedule and benefit amounts. Moreover, we show the importance of allowing automatic stabilizers to play out in the computable general equilibrium model, i.e. the role of progressive income taxation and benefits. In a traditional CGE, income taxation is modelled as a (macroeconomically calibrated) proportional tax rate. Change in market incomes would not change the tax burden in such model. However, since taxation is progressive, the tax burden responds to (real) changes in market income. The MSM, with the detailed modelling of the non-linear tax-and-benefit system captures this. We propose in this paper a simple bottom-up feedback, in which we update the proportional tax rates in the CGE with the results of a first run of the MSM, as an alternative to the estimation of a parametric (macroeconomic) progressive tax-and-benefit function to be included in the CGE. Not accounting for automatic stabilizer, overestimates the revenue recycling budget available by one half. This is also relevant for fully integrated CGE-MSM models. We find that medium-skilled employees are on average net losers of the impacts on prices and labor demand. Traditional revenue recycling schemes, such as lumpsum transfers or linear labor income tax cuts cannot overturn this welfare loss for medium-skilled, while still guaranteeing progressivity of the net impacts of the reform. However, more targeted revenue recycling schemes, inspired by the existing low wage subsidies in Belgium (the work boni) are equipped to target revenue recycling towards those most hit by the impacts on the labor market. However, robustness checks show that the adequacy of such revenue recycling design depends on the labor market assumptions in the model, specifically whether the decreased demand for medium-skilled can be translated in higher involuntary unemployment in equilibrium.
Read MoreThe Distributional Effects of Carbon Pricing in Germany
Even though economists prefer the instrument of carbon pricing to reduce greenhouse gas emissions over regulatory policies, fears of regressive effects that disproportionately burden low-income households lead to low public support, hindering the political feasibility of carbon pricing. In light of an ongoing policy debate and lacking evidence for the German context, this paper investigates the distributional effects of carbon pricing in Germany, as well as possible redistributive polices. I analyze three channels through which carbon pricing affects the distributional outcome: the direct price effect, the indirect price effect and the behavioral response. I then compare a lump-sum transfer, a targeted transfer per income deciles and reductions in labor and income taxes as redistributive policies, providing evidence on their effect on counteracting adverse distributional consequences from carbon pricing.
Read MoreTowards a distributionally painless carbon tax through revenue recycling
Carbon taxation is widely seen by economists as one of the top instruments for reducing greenhouse gas emissions and achieving ambitious decarbonization targets. Yet, despite its efficiency, it often faces public opposition, mainly driven by distributional concerns. A broad consensus in the literature holds that, in the absence of revenue recycling, carbon taxes tend to be regressive, disproportionately burdening low-income households. Consequently, a substantial body of research has focused on designing compensatory mechanisms,such as lump-sum rebates, tax shifts or targeted transfers, to restore progressivity and improve public acceptability.
Read MoreWho bears the cost of carbon pricing? Gender differentials in carbon footprint and distributional impact of carbon pricing across Europe
This paper examines the gendered distributional effects of carbon pricing across six European Union countries, focusing on differences in household carbon footprints and exposure to carbon-induced price increases. While prior research has primarily emphasized the income-based regressivity of carbon taxes (Maier et al., 2025), this study addresses the relative neglect of gender disparities in emissions patterns and welfare impacts.
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