To ensure climate policies promote equality, we need to dig into the politics of our policy options.

How can we cut carbon emissions in a socially just way? Setting an appropriate price on carbon is the most economically efficient way to achieve net zero emissions by mid-century. But can carbon pricing also promote social equality, or are other policy tools better suited to this goal?

Many people knowing economics think that carbon pricing can easily promote equality: one just has to make sure the revenue generated by a carbon price is mainly used to support low-income households. However, others doubt the political feasibility of this move, pointing out that where carbon prices have been successfully introduced, the revenues have rarely been spent progressively. Indeed, in real world politics the revenues are much more often earmarked for green projects or go into the government budget, such as the German carbon price revenue. Social justice, it seems, is rarely prioritized when it comes to carbon price reforms.

It is true that beautifully efficient and also progressive carbon price policies can be designed in economics papers.But if we stand up to political reality, other policy measures might be preferable. On the other hand, if real-world carbon pricing canbe progressive, we would have an important way to combine efficiency and justice.

To investigate this issue, we used empirical data on car sales to model the equality effects of carbon prices compared to environmental energy standards. Two robust results emerged from our research: First, carbon prices complemented by progressive redistribution of the revenues, as in Austria or Switzerland, indeed reduce income inequality better than any energy standards. This is unsurprising since energy standards do not generate tax revenues that can be redistributed to low-income households.

But what if such progressive redistribution is a rare exception to political reality—a policy red herring, as it were? Assuming that carbon price revenues will go to the general government budget or green projects, our study shows energy standards can indeed be more socially just. This is because richer consumers buy fancier versions of certain goods, such as cars, that can be harder to decarbonise. So if social justice is not possible in an environmental tax reform, an energy standard can be fairer.

Whether energy standards actually are fairer depends on what products are covered and how the standards are designed. Standards on household goods like dishwashers, for example, are not progressive because richer households simply buy more efficient dishwashers. In cases like this, carbon prices are more progressive than efficiency standards—even if the revenue is not redistributed to poorer groups. But people choose durable products such as cars for other reasons than energy efficiency—think about acceleration, roominess and comfort. If these other deciding factors make it more difficult to produce energy-efficient products, the opposite is true and energy standards can be more progressive than carbon prices.

To conclude, the question whether carbon pricing or other policy tools are better suited to promote social equality cannot be answered unequivocally. Instead, the answer crucially depends on the political feasibility of targeted transfers of carbon price revenues to low-income households. If not feasible, there may be  a fairness case for some energy standards.

This study was published in Journal of Environmental Economics and Management:

Zhao, J., & Mattauch, L. (2022). When standards have better distributional consequences than carbon taxes. Journal of Environmental Economics and Management, 116, 102747.

This is an abridged version of an op-ed original published by LSE Blogs: https://blogs.lse.ac.uk/europpblog/2024/02/06/why-energy-standards-can-be-fairer-than-carbon-pricing-schemes/