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Distributional Impact of Carbon Pricing in Central and Eastern Europe

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The surge in energy prices that began already before the Russian invasion in Ukraine has starkly revealed the need for a new global strategy for solving the energy policy trilemma of security of supply, affordability and sustainability, all the while minimizing geopolitical risks. The high fossil energy intensity of most European economies has been a key factor behind the rising energy poverty across the continent.

Carbon pricing is widely seen as an effective policy option to pursue reductions in GHG emissions as it reduces the negative externality of GHG emissions. If designed together with other policies, promoting low carbon alternatives and providing income support to households, carbon pricing can be effective at lowering emissions, spurring investment in low emissions technologies and behaviour change while reducing energy poverty. Governments need to focus on the implementation of carbon prices and revenue redistribution to ensure support reaches the households that need it most, particularly in countries with historically low EU funds absorption rates and ineffective social welfare policies.

The current paper provides an assessment of a hypothetical carbon tax in Bulgaria, Germany, Hungary, Poland, and Romania. The macroeconomic impact is evaluated by calculating the effects of this carbon tax on gross domestic product (GDP) and employment by sector. At micro level, the focus is on welfare and energy poverty, before and after revenue redistribution.

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