Blog Post

New Resources Article—The Impacts of a US Carbon Tax across Income Groups and States

This May, six of Europe’s largest oil and gas companies penned an open letter to the United Nations affirming their support for a carbon price. BG Group, BP, Eni, Shell, Statoil, and Total wrote that although they have already begun participating in carbon markets and applying “shadow” carbon prices to their investments, national governments ultimately will need to take charge of implementing carbon prices “even-handedly” to reduce “uncertainty about investment and disparities in the impact of policy on businesses.”

These potential disparities—not just among businesses, but also among households—have become a subject of increasing interest to economists, many of whom agree that pricing carbon emissions is the most efficient way to reduce greenhouse gas pollutants. Both a carbon tax and a cap-and-trade program introduce a price on carbon and, in so doing, affect different regions, businesses, and households in different ways. Both also create an asset of significant value—the tax revenues or allowances—and the distribution of that asset greatly affects who gains and who loses from carbon pricing.

In our new research (presented at the September 22 RFF event, “Pricing Carbon Impacts Low-Income Households”), we modeled the impacts of a carbon tax with three different ways to distribute the revenue and looked at the initial effects on US households. Each of these could alternatively be interpreted as cap-and-trade policies with a marginal allowance price equal to the tax level, and with the allowance value used in different ways. Each scenario uses a $30 tax per ton of carbon dioxide (CO2). The policies recycle the revenue according to the following alternatives:

  • Scenario 1: Revenue is returned to households via lump-sum rebates.
  • Scenario 2: Revenue is used to cut taxes on capital income.
  • Scenario 3: Revenue is used to cut taxes on labor income.

We then went a step further by determining the effects of these policies across US income groups as well as US states. Our results confirm that the effects of a carbon tax on energy prices are somewhat regressive, but that recycled revenue can be used to outweigh this effect.

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