Making climate change mitigation policy less regressive in the residential sector

Uniform climate policy instruments such a carbon tax can disproportionately affect poorer population groups. Some modelling studies have analysed how these regressive impacts can be offset via ex-post carbon revenue recycling policies. Instead, we implement two distributive policies endogenously in the IMAGE Integrated Assessment Model, i.e. a carbon price exemption and a financial incentive for PV adoption for low-income households. Exempting low-income households from carbon pricing sharply lowers their energy costs, especially in regions where uniform prices would be most regressive; but they also increase the risk reinforcing fossil fuel reliance among these income groups. PV incentives can also reduce inequality peaks in the short term and, depending on local circumstances, even leading to progressive outcomes in some regions. This capability-bolstering approach can additionally provide beneficiary poor households greater financial and energy security benefits in the long term, and encourage their transition towards cleaner and more efficient energy use choices. Our findings show that both redistributive measures can deliver systemic and sustained reductions in regressive effects of the uniform carbon price, but their respective effectiveness depends strongly on regional context. The combined policy achieves the most pronounced results, lowering the projected Gini increases by up to half on average across regions compared to the mitigation scenario without any redistributive measures.