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Assessing the distributional consequences of the transition in the EU

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Institution
European Union - European Commission
Author(s)
Matthias Weitzel, European Commission, Joint Research Centre, Economics of Climate Change, Energy and Transport Unit
Published
Topic Area
The economic and fiscal impacts the green transition
Question
What are the distributional and socioeconomic impacts of the transition and how can they be managed?
Citation

European Union—European Commission (2025) Assessing the distributional consequences of the transition in the EU, Contribution to ‘Compendium of Practice from a Global Community of Ministries of Finance and Leading Organizations’, Coalition of Finance Ministers for Climate Action

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Implementing the Fit-for-55 package would increase the cost of energy (and related equipment) relative to the baseline, with regressive effects in the absence of redistribution.

Pairing the output from the JRC-GEM-E3 model, which takes inputs on the transition of key sectors from PRIMES, with detailed microdata from the European Household Budget Survey (HBS) evidences these regressive effects. It also shows a progressive effect can be achieved by a lump sum transfer using (a fraction of) the additional revenue from the package’s expanded carbon pricing, especially when this is targeted to households at risk of poverty.

Key Messages

  • The Fit-for-55 package is associated with an increase in the cost of energy relative to the baseline due to expanded carbon pricing (wtin the EU ETS expanding to include buildings and road transportation) and additional investment needed to comply with more stringent standards (e.g., for buildings or vehicles).
  • The JRC-GEM-E3 CGE model, designed to capture the macroeconomic implications of energy scenarios from the PRIMES energy model, does not directly account for regressive effects, as it models a single, representative household.
  • Analyzing the CGE model output using microdata on household expenditures, from the European HBS in this case, can shed light on distributional effects and indicate the impact of redistributive policy.

Suggested next steps for MoFs include designing redistributive policy, especially given the prospects of additional carbon pricing revenues.

Keywords
combining approachesdistributional consequencesmodelspolicy designtransition