Conference Agenda

This paper assesses the macroeconomic, environmental and distributional impacts of different strategies for recycling EU ETS and ETS2 revenues in the Czech Republic, using a detailed hybrid general equilibrium model (MERCI-CZ) supplemented with sectoral details and consumer behaviour models.

The analysis confirms that carbon pricing can bring not only emission reductions, but also economic and social benefits if revenue recycling is set up appropriately. At the same time, it shows that the choice of revenue allocation method fundamentally affects the balance between short-term economic stability, long-term structural transformation and social equity.

In all scenarios, moving to carbon neutrality by 2050 implies a significant macroeconomic adjustment, with GDP falling by 4.5-6% in 2050 compared to the WEM reference scenario without the Fit for 55 package. The differences between the scenarios are mainly due to the way the revenues from auctioning emission allowances are used. The WAM NECP and WAM SCF scenarios - combining social

support and targeted investment in green technologies - are able to mitigate the negative impacts on GDP in the initial phase and even generate modest short-term gains. Household consumption in these scenarios grows both through direct financial support and through long-term savings from increased

energy efficiency and electrification.

In contrast, the WAM NoSocial and WAM Debt scenarios show the risks of no support for household demand. While these approaches reduce fiscal spending, they reduce consumption in the early years, deepen the decline in output and delay the social benefits of the transition. The Debt scenario - using revenues to reduce public debt - shows the worst results for GDP and consumption in the first half of

the period, although it partially makes up the difference in the later stages due to lower operating costs.

From an environmental perspective, all scenarios with ETS2 achieve significant and sustained emission reductions, with NoSocial performing best due to the highest investment in energy efficiency and technology. However, these additional reductions are offset by weaker short-term economic performance

and the absence of direct support to vulnerable groups. The NoETS2 scenario shows that while exempting transport and buildings from carbon pricing reduces economic costs, it slows decarbonisation in key sectors.

The results highlight that there is no clear best strategy for revenue recycling. The optimal approach should balance support to households with targeted investments in low-carbon technologies to mitigate disparities in impacts, maintain policy acceptability while achieving deep emission reductions.

Strategies focused solely on fiscal consolidation or technology investment may undermine social acceptance or slow economic recovery. The analysis confirms that linking carbon pricing to fiscal, social and industrial policies is key to making the path to carbon neutrality economically feasible, socially equitable and environmentally ambitious.