Will the centralisation of carbon pricing revenue in the EU lead to laxer climate policy?

Abstract

We analyse the economic impact of using carbon pricing revenue to fund the 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 centralisation may also contribute to higher emissions.