Climate policy is currently high on the policy agenda, both in the EU and worldwide. However, other pressing social issues are challenging the design and implementation of climate action. The most striking and pressing of these issues is the effect that a more stringent climate policy may have on income distribution. This project focuses on those effects in Italy, by providing a novel perspective that puts together environmental policy design, political economy aspects, and compensation policies. The objective is to investigate the actual versus perceived distributional impacts of the climate policy. Particular attention will be devoted to the role of revenues from a specific EU carbon pricing policy (the EU ETS) in compensating for adverse distributional effects on the poorest parts of the Italian population. To examine these issues, we will proceed along three main lines. First, we highlight the links between increases in carbon pricing and the consequent distributional effects. The novel contribution in this respect rests in our attempt to identify the sources of "distortion" in citizens' distributional impact perceptions and the resulting increase in the needed compensation measures, based on a twofold research effort rooted in energy demand analysis and survey-based evidence. This part of the project also relies on the detailed study of political sentiment, stemming from a social-network based analysis of politicians’ view on the trade-off between climate mitigation and income distribution, as people in political institutions are expected to act as a “sounding board” of citizens’ attitudes but also as driving forces of those attitudes.
Second, we compare potential resources deriving from EU ETS revenues with those that are actually needed for redistribution purposes. A more stringent carbon permits price is expected to increase available resources only up to a certain level, following a “Laffer type” rule, due to the reduction in the allowance demand. As a result, the trade-off between climate policy stringency and distributional impacts may be more intense for ambitious climate objectives. The project is novel in this respect, as it is, to our knowledge, the first attempt to empirically assess a “Laffer curve” for ETS revenues.
The final part of our work will be based on quantitative analysis performed in the first two steps, that will feed into an Agent Based Model capable of simulating different climate policy scenarios, to study in detail the distributional effects of each policy across heterogeneous agents and sectors. The novelty of this approach will rest on the integration in the model of the inputs deriving from previous steps and in the ability of the modelling effort to explicitly account for economic agents’ sentiments and perception, thus providing useful insights on the climate policy's acceptability.