Global inequality consequences of climate policies when accounting for avoided climate impacts

Concerns have been raised against using carbon pricing for fighting climate change, as these might disproportionally affect lower-income households and thus increase inequality. However, the distributional implications of climate policies will depend on policy design and their capacity to reduce climate change impacts. To quantify the interaction between climate policy and climate benefits on economic inequality, we develop a numerical climate-economic framework featuring both within- and between-country income heterogeneity. We implement a well-below 2°C target and examine a variety of redistributive schemes. We find that climate change impacts increase economic inequalities within and across countries. Climate policy reduces this increase by half, and an appropriate transfer scheme targeted at low-income households can eliminate it altogether. An equal per-capita redistribution scheme leads to most of the population being economically better off already today. The analysis shows the importance of including climate-economic benefits in the evaluation of climate policies.