carbon-tax

Photo: freedomoutpost.com

In attempt to mitigate the adverse effects of global warming, one of the key measures considered by policy makers is the introduction of a carbon regulation in hopes that alternative, cleaner energy sources may be supported. In the event of a hypothetical carbon tax, households in the lowest income group would pay as a percent of income more than twice what households in the highest 10 percent of income distribution pay, according to a Stanford study. With this in mind, a fairer regulation system needs to be deployed, the researchers suggest.

This obviously occurs because poorer households spend a large chunk of their income on basic energy necessities, like transportation, electricity or heating, than corporations.

“This regressivity can be addressed through transfer payments, if and when the U.S. decides to regulate greenhouse gases leading to climate change,” said Charles Kolstad, a senior fellow at the Stanford Institute for Economic Policy Research and thePrecourt Institute for Energy, who researches environmental economics, regulation and climate change. As an example, he suggests reducing the payroll tax for lower income groups as a way to make a carbon tax more fair.

Bureau of Economic Analysis data was examined for the scope of the study and a hypothetical tax of $15 per metric ton of carbon was used  as part of the scenario. The researchers looked at how such a hypothetical tax would hit individual income groups, industries and different regions. In other words,  under this scenario each individual or organization that emits one metric ton of carbon into the atmosphere through its activities will have to pay 15 dollars. The researchers note, however, that such a tax would cause increase in prices for some commodities as well as substitutions which may somewhat dampen the regressive nature of such costs. For instance, if the price of heating oil goes up as a result of the supplier wanting to cot losses due to the tax, people may use more electricity or natural gas to warm their homes.

The study address a very important question that policy makers need to answer before making any important political or social decisions: who pays more and who pays less following carbon regulation.

One of the most significant problems associated with passing any sort of legislation is perceived fairness. Although there are other issues, fairness in paying for the legislation and fairness in the benefits that the legislation generates can be key to passage. This work helps understand the extent to which paying for carbon legislation can be perceived as fair or unfair, with obvious remedies for correcting any unfairness,” said Kolstad said.

The poorest households spend a higher percentage of their income on fuels for heating and transportation, while higher income individuals spend proportionately a greater amount on services, which usually have lower than average carbon emissions per unit of output.

“Emissions increase more slowly as income increases. Thus, one would expect some regressivity in a carbon tax,” the study stated.

While the costs of greenhouse gas regulations are broadly spread over the entire economy, some industries are hit harder, according to the study’s hypothetical carbon tax. These would include electric power, fertilizer, cement and coal-related industries like mining and transportation. Lime, a key ingredient in the manufacture of cement, would see the highest cost increase at 15 percent. In the end, the extend to which the various industries will become affected by the carbon tax will depend on their capabilities to pass their losses on to the consumers.

Still, these most highly affected industries contributed only 1 percent to the total gross output of the U.S. economy in 2011, according to the study.

“This suggests that the adverse incidence of such a tax can be ameliorated through highly targeted financial assistance, without reducing the incentive benefits of a carbon tax,” the paper stated.

The results were published in a paper as a  SIEPR policy brief. 

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