WASHINGTON, DC—RFF today posted a recent study about impacts of carbon taxes of various design across US household income groups. Many prior studies have focused on the potential economy-wide costs of a carbon tax and have found this tax to be an especially low-cost approach to reducing the carbon dioxide emissions that contribute to climate change. In contrast with these studies, this study assesses how the carbon tax’s costs are distributed across US household income groups.
Their results indicate that the distributional impacts depend importantly on the nature of revenue recycling and the treatment of transfer income used in tax design.
According to the authors, the impacts on households can be divided into what economists term use-side and source-side effects. Use-side impact is the effect on purchasing power. A carbon tax alters the relative prices of the goods and services that households purchase. The source-side impact is the change in a household’s nominal labor, capital, and transfer income. A carbon tax generally will affect (positively or negatively) after-tax wages, returns to capital, and transfers. The study considers both types and applies extended measures that add up to the overall welfare impact.
The researches find that in the absence of targeted compensation to achieve distributional objectives, the use-side impacts tend to be regressive, while the source-side impacts are progressive. The progressive source-side impacts tend to fully offset the regressive use-side impacts.
The authors are Lawrence H. Goulder and Xianling Long, Stanford University; Marc Hafstead, Resources for the Future; and GyuRim Kim, UCLA. Their study is, Impacts of a Carbon Tax across US Household Income Groups: What Are the Equity-Efficiency Trade-Offs?
They note that in “contrast with earlier studies, we find that under plausible assumptions, the lowest household income quintile does not suffer an absolute reduction in welfare under the carbon tax. We also find larger source- and use-side impacts than what the narrower welfare measures used in previous studies would predict.”
Read the full study: Impacts of a Carbon Tax across US Household Income Groups: What Are the Equity-Efficiency Trade-Offs?