The Regressive Carbon Tax

A new NBER working paper promises to blow up the myth that it is primarily the wealthy that will bear the cost of taxes on carbon emissions. In “Who Pays a Price on Carbon?” Corbett A. Grainger and Charles D. Kolstad explore the possibility that “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.”

One of the assumptions of the study is that “all costs are passed on to the consumer,” which seems to be appropriate given the state of things in the oil refining business, for instance. As Christopher Helman writes in Forbes, “Even though rising fuel costs and taxes can mostly be passed along, they depress demand for refining. That causes refining margins to implode.” This brings up another set assumptions in the NBER study, however, that doesn’t account for modifications in demand, worker wages, or investor returns.

The authors are also improbably sanguine about the possibility of using the government to redistribute tax revenues to the poor to offset the regressiveness of the tax: “A price on carbon could yield substantial government revenues, and careful recycling of these revenues could offset the regressive nature of a national GHG [greenhouse-gas] emissions policy.” These revenues could also form the basis for a whole new government bureaucracy, which is much more likely than “careful recycling.”

But even with all those caveats, the point that the poor are almost always disproportionately impacted by policy decisions like this is an important one, which raises moral considerations beyond the dominant paradigm surrounding the question of carbon emissions, which simply pits the the impoverished two-thirds world against the developed world.

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  • Joe DeVet

    Once again I point out that even this troubling insight does not touch on the real, drastic, and long-term harm to the poor done by any governmental attempts to “combat” “global warming.”

    It’s the systemic effects on the whole economy which will harm the poor more than anything. The carbon tax will inhibit business development, put a damper on job creation, and in many ways ensure that our economy will not develop as it should.

    Any intervention with these consequences inconveniences the rich, but causes real hardship to the poor. A Catholic should therefore, in principle, oppose this wasteful and unnecessary policy.

  • plowshare

    I have read in many places that Al Gore, the climate change guru, has a huge mansion and private jet, both of which result in huge carbon emissions, yet is considered a “good guy” because he purchases what is mysteriously called “carbon offsets” which supposedly reduce his “carbon footprint” to less than what a poor person can afford to purchase.