Climate policy and social justice

In the TransFAIR project, the distributional impacts of a CO₂ tax outside the emissions trading system on households in Styria were investigated. The focus was on

• the impact of associated price increases on vulnerable groups (such as households with above-average energy expenditures and incomes below the poverty line),
• urban-rural differences in impacts, and
• the effects of different revenue recycling schemes on social acceptability.

The study was carried out using a micro-econometric model of households’ consumption demand. This model allows for a quantitative analysis of interdependencies and the development of a numerical basis for designing accurate compensation mechanisms for vulnerable households in Styria.

The project results are now available online in the form of a factsheet and a working paper. Measured by the change in the cost of living, the results suggest that households in rural areas of Styria are significantly more affected by a CO₂ tax on heating and motor fuel than households in urban areas. Reasons for this include a higher dependence on cars and a higher share of fossil-based heating systems. Compared to the Styrian average, the differences between urban and rural areas within the considered groups of vulnerable households are generally less pronounced, as the respective vulnerability definitions capture some of the influencing factors that lead to different impacts of a CO₂ tax on rural and urban households. For households classified as vulnerable according to the definitions considered, the impact of CO₂ taxation is up to two times higher than for the average Styrian household, and up to 2.2 times higher if they additionally live in rural areas.

The combination of CO₂ taxation and an appropriate revenue recycling or compensation system can transform the regressive nature of the tax - lower and middle-income households are more affected than upper-income households - into net progressivity. Among the compensation systems considered, those that differentiate between vulnerable and non-vulnerable households ("target group") or between low and high-income households ("income") most effectively reduce the negative welfare effects of a carbon tax on vulnerable households and most strongly counteract income inequality.

TransFAIR was funded by the Province of Styria, Department of Science and Research, in the course of the call for proposals "The Green Transformation: Challenges and Opportunities".

Conact: Mag.^a Judith Köberl