Addressing distributional impacts of carbon pricing policies

Putting a price on carbon is a key tool for a cost-effective transition to a low-carbon economy. Carbon pricing, whether through emissions trading or carbon taxes, harnesses market forces, engages the private sector in abatement efforts and generates public revenue. While the benefits of carbon pricing have been well established, little attention has so far been paid to how to address the distributive impacts of the policy, especially on the most vulnerable groups. This in turn is key to ensuring public support for the instrument over time, and to enable what is now often termed a ‘just transition’.

What constitutes a socially just carbon pricing policy and what can be considered current best practice in this regard? The present paper systematically discusses how different societal groups – households, local communities, workers and firms – may be affected by a carbon price. Drawing on real-life examples from jurisdictions that are currently implementing carbon pricing and from academic literature, the paper maps and assesses options for designing socially robust policies. In many cases, the use of carbon pricing revenue holds significant potential to alleviate possible adverse effects from the policy. In other cases, there may be grounds for altering the design of the carbon pricing mechanism, or for resorting to complementary policies and measures.