The Distributional Impacts of US Energy Policy
This paper surveys energy policy in the United States from a distributional perspective.
Highlights
- Much of US energy policy is carried out through regulation rather than taxation.
- Most regulations are regressive by favoring higher income household consumption.
- A carbon tax could substitute for many climate-related regulations.
- Factor price changes enhance the progressivity of a carbon tax.
- The return of carbon tax revenue can increase its progressivity.
Abstract
This paper surveys energy policy in the United States from a distributional perspective. Focusing on the distributional impacts of energy taxes is too narrow a framework. The United States relies much more heavily on regulation than taxation to address energy-related market failures. It argues that most regulatory policies and tax subsidies to achieve energy policy goals are regressive. This includes fuel economy standards, EV purchase incentives, and energy efficiency tax incentives. In contrast, a carbon tax is likely to be progressive, even when ignoring the use of revenue. The view that carbon taxes are regressive stems from an incomplete distributional analysis that assumes all impacts arise from increases in the costs of consumer goods and services. Recent analyses have emphasized the importance of impacts on sources of income. In particular, a carbon tax is likely to reduce returns to capital more than wages. With capital disproportionately held by higher income households, this differential factor income effect is progressive. In addition, transfer income, more important for lower income households, tends to be indexed and so contributes to a carbon tax's progressivity. How carbon tax revenue is used can add even greater progressivity to a carbon tax reform.
