Prices and Standards for Vertical and Horizontal Equity in Climate Policy

Distributional concerns can influence optimal climate policy design. We compare distributional implications of EU climate policy pathways that differ in their instrument mix, considering carbon pricing and non-price regulation, as well as revenue recycling via uniform transfers and subsidies towards household investments in energy efficiency. We combine energy-economic modelling with a newly constructed dataset of over 240000 households that captures both income- and expenditure-side variation between and within income groups. Results indicate that a policy package with multiple instruments can be the preferred option once impact variability between and within income groups matters, conceptualized by vertical and horizontal equity considerations, respectively. Standards mitigate horizontal equity concerns, while carbon pricing generates revenues for uniform transfers to counteract regressive effects across income groups, and for energy efficiency subsidies to ease within-group impact heterogeneity. These results provide an explicit, quantified, equity-based rationale for the adoption and acceptability of comprehensive climate policy packages