Results & Conclusions

For a detailed description of the project results, see the section Materials & Publications, which includes amongst others links to the FARECarbon Policy Brief and the FARECarbon Working Papers.

In brief, our analysis highlights different macroeconomic impact chains of carbon pricing policies across two common modelling approaches (Neoclassical and New Keynesian). While there is commonality regarding two primary impact chains, i.e., loss in productivity and a shift towards labor intensive sectors due to carbon pricing, we find substantial differences in how impact chains in the labor market, capital market, goods and services market, and the public budget affect prices, income and consumption. A crucial difference can also be identified in how consumption (both private and public) reacts to changes in income. Revenue recycling measures can enhance or mitigate carbon pricing impact chains – which may also differ between model variants.

Highlighting theses structural differences can shed light on the bandwidth of potential impacts of carbon pricing across different macroeconomic disciplines and allows policymakers to select a carbon pricing policy that is robust in terms of expected impacts, considering the current state and structure of the economy. We recommend expanding such analyses and including more macroeconomic disciplines and modelling approaches (e.g. agent based models, system dynamics).

With respect to robust policy options for revenue recycling, we find that a reduction in non-wage labor costs can boost economic activity but is not able to mitigate the regressive effects of carbon pricing. The opposite is true for revenue recycling via climate bonus payments. The highest potential for a triple dividend, i.e. positive ecological, macroeconomic and distributional effects of carbon pricing in combination with revenue recycling, lies in a combination of these two recycling options. Downstream microsimulations indicate improvements in income equality for such a policy mix, but also increases in the cost of living, particularly for households in thinly populated areas.