Can climate change be tackled effectively through a fair and widely accepted carbon pricing policy?
Carbon pricing is key in cutting emissions. One way to promote its acceptability is to recycle the revenues it generates through transfers to households. However, this implies a deviation from the climate change policy targets, as transfers typically boost consumption, generating additional emissions. This paper considers these trade-offs in the design of a carbon pricing policy for Spain that addresses climate change as effectively as possible, while it does not raise poverty and inequality and gains the support of the majority of society. Our analysis relies on a demand system with consumers’ heterogeneous reactions to price and income shocks and on households’ carbon footprints. This allows us to determine the total amount of benefits to be paid and the households that need to receive them to ensure that the policy is ecologically and socially optimal. These findings may help Spain develop an effective, fair and widely accepted carbon pricing policy.