HOW REGRESSIVE IS A PRICE ON CARBON?
January 27, 2010
Under either a cap-and-trade program that limits carbon emissions or a carbon tax that imposes an outright tax on these emissions, the poor may be among the hardest hit. Because they spend a greater share of their income on energy than higher-income families, households in the lowest fifth of the income distribution could shoulder a relative burden that is 1.4 to 4 times higher than that of households in the top fifth of the income distribution, according to a study by Corbett Grainger and Charles Kolstad, conducted for the National Bureau of Economic Research (NBER).
Previous research already suggests that a carbon tax would probably be regressive. The NBER study further bolsters this conclusion with several key points:
First, by linking the amount of carbon emissions from each industry to consumer expenditures by income group, the authors show that consumption differences explain the regressivity of a carbon tax:
- Assuming a levy of $15 per ton of carbon dioxide, which is in the range of current proposals in Congress, the authors calculate that the one-fifth of households at the bottom of the income distribution would spend an extra $325 a year.
- That's less than a third of what the one-fifth of households at the top of the income distribution would pay annually.
- However, households in the low-income group earn only one-tenth as much as those in the high-income group on average, so their burden relative to income would be almost four times higher.
The second key point is that calculations by household understate how regressive a price on carbon would really be:
- That's because households in the highest income quintile are much larger -- averaging 3.1 persons -- than those in the lowest quintile, which average only 1.8 persons.
- Accounting for those differences (and for economies of scale in household consumption), the authors calculate that the real impact of a carbon tax on a person in the lowest income quintile would be nearly five times more burdensome than for someone in the top income quintile.
- Using lifetime income in this calculation, the burden would be 2.2 times greater.
Source: Laurent Belsie, "How Regressive is a Price on Carbon?" NEBR Digest, January 2010; based upon: Corbett A. Grainger and Charles D. Kolstad, "Who Pays a Price on Carbon?" National Bureau of Economic Research, Working Paper No. 15239, August 2009.
Browse more articles on Environment Issues