Will the centralization of carbon pricing revenue in the European Union lead to laxer climate policy?

Abstract

We analyze the economic impact of using carbon pricing revenue to fund the European Union (EU) budget. Such a reform would redistribute from countries with above-average carbon-intensive production to less-carbon-intensive countries. Once the reform is implemented, the low-carbon countries will prefer a lower carbon price (i.e., laxer climate policy at the EU level) than before the reform, and vice versa. As a result, EU climate policy becomes less ambitious and less disputed, where quantitative impacts presumably remain small. Weaker incentives for national governments to enforce emission taxes after revenue centralization might also contribute to higher emissions.