Carbon taxes on consumption: Distributional implications for a just transition in the EU

Authors

Sofia Maier, Silvia De Poli, Antonio F. Amores

Publication Date

Mar 2025

Abstract

Carbon taxes on household consumption can simultaneously increase public funding
and promote greener consumption habits, an appealing combination for the just
transition plans of the European Union (EU). However, concerns about equity and
public support pose challenges. This paper assesses the distributional and budgetary
effects of various designs for an EU-wide hypothetical carbon tax on households
consumption. To this end, we extend the EU tax-benefit microsimulation model,
EUROMOD, with greenhouse gas (GHG) emissions data from input-output tables and
estimate households’ carbon footprints. We show that a carbon tax on households GHG
emissions would be regressive, thereby inequality-increasing. This is primarily due to
the low income elasticity of highly GHG-intense necessity goods, such as food and
heating, which represent larger shares of income at the bottom of the distribution. Still,
we demonstrate that this inequality-increasing impact can be offset with compensatory
cash transfers (though these may be challenging to implement), and at least partially
reverted with more progressive (and presumably feasible) tax designs, including rate
differentiation by products and tax allowances.

Publication type

EUROMOD Working Paper Series

Series Number

EM3/25

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