Drawing from more than 20 years of economic study, Daniel F. Morris and Clayton Munnings argue that the regressive impacts of a carbon tax can be addressed by well-crafted policy.
In some circles, a tax on carbon dioxide emissions is presented as a bogeyman that will make poor people even poorer. As quiet discussions continue about the viability of carbon taxes to help address the nation’s fiscal issues, the potential impacts to low-income groups from higher energy prices will no doubt be used to fight against progress. Economic research from the past few years, however, suggests the negative effects of carbon taxes on these groups are not as extensive as politicians would tell us.
Although putting a price on carbon may possibly have regressive impacts, economic estimates can overstate these impacts by using short-term or nonrepresentative income measures. In fact, some research suggests that a carbon tax may even be progressive in certain cases. Moreover, it would not be difficult to craft market-based control policies that protect vulnerable classes of citizens while reducing the country’s greenhouse gas emissions.
In a recent RFF issue brief, we underscore both these points. We surveyed more than 20 years of economic study to determine how households are impacted by carbon taxes and how to limit or offset income losses to low-income populations. The results provide some useful guidelines for designing carbon taxes in the United States. Critical findings include the following:
- Carbon taxes are probably not as regressive as they are often characterized, and they appear even less regressive when using measurements based on annual household consumption or accounting for tax effects for producers. In some cases, they may be slightly progressive.
- Regional differences in the effects of a carbon tax are small.
- Government programs that index to inflation may contribute to a more progressive tax.
- Low-income households can be compensated for increased prices with carbon taxrevenue. If it is returned through direct rebates, the results will be progressive and reach more households, but targeted tax swaps may have similar effects.
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