Carbon pricing has become a key instrument in the EU’s efforts to mitigate climate change, particularly through the EU Emissions Trading System (EU ETS), which caps corporate emissions. However, this article points out that while carbon pricing helps reduce greenhouse gas emissions, it also brings about clear and uneven economic and political costs. Based on a large dataset covering 224 regions across 20 countries over 20 years, the research finds that rising carbon prices lead to significant drops in regional output and employment, with household incomes also negatively affected. Most notably, these economic shocks contribute to a rise in political consequences—support for extremist and populist parties has notably increased in affected regions, especially for far-right parties.
The study finds that the effects of carbon pricing are not evenly distributed, but highly dependent on a region’s carbon intensity (i.e., emissions relative to GDP) and the share of free allowances it receives. Regions with higher carbon intensity and fewer allowances suffer greater economic setbacks and are more likely to see voters shift their support toward parties opposed to mainstream climate policies. This trend aligns with the recent political polarization and the rise of extremist parties during times of economic difficulty across Europe.
Additionally, drawing on Eurobarometer survey data, the study reveals that rising carbon prices lead to increased pessimism among households about their economic prospects, and a decline in the importance they assign to environmental issues. The researchers also compare the impacts of carbon price shocks with those of oil price shocks, finding that while both cause similar levels of economic pressure, carbon pricing is more likely to provoke political backlash—possibly because voters see oil prices as external forces, while carbon prices stem from deliberate government decisions.
While carbon pricing is fundamentally a sound policy for environmental protection, its implementation brings serious side effects. For regions dependent on carbon-intensive industries, the economic impact is particularly severe—and with that, the political consequences follow. These dynamics not only threaten the legitimacy of climate policy but also risk worsening internal inequality across Europe. That’s why the authors’ recommendations—such as tax rebates or direct subsidies to reduce the financial burden on citizens, and improving fairness and transparency—make a lot of sense. After all, for a policy to endure, it’s not just about its environmental impact, but also about how it affects and is perceived by different groups in society.
Source: VoxEU CEPR
Website: https://cepr.org/voxeu/columns/unequal-costs-carbon-pricing-european-regions
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