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Abstract:
Carbon pricing is the efficient instrument to reduce greenhouse gas emissions.
Nevertheless, the geographical and sectoral coverage of substantial carbon pricing
remains low, often due to concerns about increasing economic inequality. Regula-
tions such as fuel economy standards are more popular. Could the reason be that
they have an equity advantage over carbon pricing? We develop two models, one
representing energy services and the other the carbon-intensity of consumption, to
identify the economic situations in which this is the case. First, we prove that an ef-
ficiency standard can be more equitable than carbon pricing when consumers prefer
high-carbon technology attributes. Evidence from the US vehicle market confirms
this finding. Second, we show theoretically, and through a numerical application
to the Chinese transport sector, that intensity standards are preferable when richer
households consume a greater share of high-emissions goods. Our results hold when
the redistribution of carbon pricing revenue is not progressive. These insights may
help advance decarbonisation when pricing instruments remain unpopular.
