This post was originally published on September 10, 2020 by Econofact.

The Issue:

There is widespread consensus that greenhouse gas emissions from human activity are contributing to rising world temperatures, increasing the frequency of devastating weather events such as hurricanes, fires, floods and droughts. In response, over 3,500 economists have signed a statement supporting the position that “a carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.” And, between 60 and 70 percent of registered voters support a revenue neutral carbon tax with the revenues returned either through tax cuts or through a “carbon dividend” to households, according to a Yale-George Mason University poll. Despite this broad support for a carbon tax, some have raised concerns that a carbon tax could place a disproportionate burden on the poor or that it would not guarantee that emission reduction goals be met. But a growing body of research finds that both of these concerns are misplaced.

A well-designed carbon tax could enhance tax progressivity and environmental justice and contribute to hitting environmental goals for emissions reductions.

The Facts:

A carbon tax raises the price of goods and services. By design, a carbon tax causes goods and services that involve higher levels of emissions to become relatively more expensive such that consumers will tend to buy less of them or substitute for others that involve a less carbon-intensive production. Hence, a carbon tax makes coal, oil, natural gas and electricity generated from them more expensive — as well as goods and services that are derived from them or depend heavily on them for their production.

Is a carbon tax regressive? A tax is regressive if it is a larger share of a household’s expenditures for lower income households. An Axios article quotes John Podesta, a former Obama advisor, raising concerns about equity with a carbon tax: “A real disadvantage of just a pricing scheme is you can’t directly attack the environmental injustice problem.” This reflects a broad perception that a carbon tax is regressive. After all, so the argument goes, a carbon tax is a tax on energy and energy is a good that is a larger share of the budgets for low-income households than for higher income households. But spending is only one part of the story.

While a carbon tax affects consumer prices – the source of the regressivity noted above – it also affects returns to labor and capital. And here, the tax is decidedly progressive as returns to capital fall more than the returns to labor. Not all the cost increases that result from imposing a carbon tax are passed on to price increases for the final goods. Some of the tax would be borne by the companies that produce oil and gas and by the workers and shareholders in those companies (see here). And what we know from recent research is that it would likely fall more heavily on owners of capital than it would on workers. For instance, a firm may make lower profits rather than pass on all the cost increase from the tax onto prices. Given the concentration of wealth at the top of the income distribution, this source-side effect adds progressivity to the carbon tax. 

Gilbert Metcalf is a Professor at Tufts University and the author of Paying for Pollution: Why a Carbon Tax is Good for America. He can be found on twitter @GibMetcalf

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