Ex-post evaluation of emissions trading in 2023 : focus on distributional and competitiveness effects

– This policy brief reviews some of the latest studies on distributional and competitiveness effects that were presented at the International Conference on Ex-Post Evaluation of Emissions Trading organised under the framework of the LIFE COASE project.
– Two main barriers to carbon pricing recur increasingly in the relevant literature: fears about negative impacts on the competitiveness of businesses if carbon prices are imposed unilaterally at the national level; and concerns about fairness, especially in relation to low-income households.
– On average, low-income households are likely to be disproportionately affected by carbon pricing, but there are significant disparities within income groups. Factors like rural or urban residence, the energy efficiency of homes, and commuting requirements all influence how households are impacted.
– Revenues from carbon pricing are increasing and governments need to choose wisely how to spend them. Green investments in energy efficiency or low-cost renewables, as opposed to lump sum payments, reduce long-term costs for households and contribute to climate targets. Fairness and distributional issues are key to public perceptions and to the social acceptability of carbon pricing. Levels of support can be increased by devoting the revenues to green investments.
– The literature suggests that there is currently little evidence of negative effects from carbon pricing on productivity and employment. Little evidence of carbon leakage has also been reported. Some evidence of innovation was found in terms of directed technological change, which may increase competitiveness.
– As the caps in emission trading systems tighten and carbon prices rise, there is nervousness of larger impacts on competitiveness of EU industry. This particularly affects the energy-intensive sectors, which have to buy their permits instead of receiving them for free.