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The Impact of a Carbon Tax on Inequality

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  • Fremstad, Anders
  • Paul, Mark

Abstract

Climate change and economic inequality are inextricably linked. Despite widespread agreement among researchers and policymakers that a carbon tax is the most efficient mechanism to curb greenhouse gas emissions, such a tax exacerbates inequality since low-income households spend a greater share of their income on carbon-intensive goods. Using Input-Output tables and detailed expenditure data for the United States, we estimate households' carbon footprints and examine the impact of a revenue-neutral tax of $50 per ton of CO2 on multiple forms of inequality. Devoting carbon tax revenue to fund a carbon dividend makes the policy progressive, minimizes redistribution among households of similar means, mitigates group-based inequalities, and benefits 56% of people, including 84% in the bottom half of the distribution. While some researchers have dismissed dividends on efficiency grounds, we show that the double dividend typically associated with labor tax cuts is insufficient to protect the purchasing power of a majority of Americans.

Suggested Citation

  • Fremstad, Anders & Paul, Mark, 2019. "The Impact of a Carbon Tax on Inequality," Ecological Economics, Elsevier, vol. 163(C), pages 88-97.
  • Handle: RePEc:eee:ecolec:v:163:y:2019:i:c:p:88-97
    DOI: 10.1016/j.ecolecon.2019.04.016
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    References listed on IDEAS

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The Unique Power of Carbon Taxes? These Climate Hawks Are Missing It
      by Charles Komanoff in Carbon Tax Center on 2020-10-05 13:15:21

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    More about this item

    Keywords

    Carbon tax; Distribution; Inequality; Environment; Climate change; Global warming; Fossil fuels; Carbon dividend;
    All these keywords.

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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