Embedding Income Heterogeneity: Global Distributional Effects of Mitigation Policies on Energy Demand and Welfare

This study assesses inter- and intra-regional distributional dynamics by introducing income heterogeneity into the MESSAGEix-IAM framework. The main point is to evaluate climate-policy effects not only between regions, but also between global income classes across regions. To do this, we implement income classes with different energy use by incorporating direct energy consumption into the utility function of the macroeconomic module MACRO, rather than treating distribution in ex-post analysis. This setup allows us to trace how carbon pricing changes welfare and energy demand across the income distribution, and to test how alternative revenue recycling designs shift these outcomes. The analysis is motivated by evidence that climate burdens, emissions, and economic capacity are unevenly distributed, and that a large part of global carbon inequality is linked to income and capital differences. Preliminary results show regressive welfare effects: lower-income groups experience larger losses, mainly because energy expenditures represent a higher budget share. At the same time, demand responses differ across income classes and sectors, which matters for policy design and for the feasibility of mitigation pathways. Building on this, we evaluate whether different recycling and effort-sharing approaches can reduce regressive effects while preserving climate ambition. As a first step, the framework remains consumption-based, but it captures distributional mechanisms endogenously and links them to the model’s energy-economy dynamics. Overall, the study contributes to ongoing efforts to integrate distributional and justice considerations into global mitigation scenarios.