An EU Sky Trust: Distributional Analysis for Hungary

We analyze the effects of EU adoption of a Sky Trust (Barnes and Breslow 2003) on the income distribution of Hungary, a lower-middle income EU member.  We use plausible parameters for an EU carbon charge and revenue recycling system, input-output data to track the effect of a carbon charge on commodity prices, and household consumption survey data to examine the effect on expenditure by decile.

We find that the carbon-charge revenue collection is nearly flat with respect to income. Combined with Sky Trust revenue recycling, the net effect on income distribution is moderately progressive. For a Sky Trust structure that would significantly increase the likelihood of the EU meeting Stern Review and IPCC greenhouse gas reduction targets, households in the top decile of the Hungarian income distribution would see incomes fall by 859 USD, or 4.4 percent. Households in the lowest decile of the Hungarian income distribution would see household budgets rise by 498 USD, or 11.4 percent. At the median household income, the effect is small but positive.