Measuring the poverty effects of a carbon tax on mobility – But how?

The distributional effects of climate mitigation policies are a major determinant of political feasibility. While prior research has addressed inequality, this paper contributes to the limited literature on poverty effects of carbon taxation, specifically for transport fuels. Transportation is currently the UK's highest-emitting sector and has made the least progress in reducing emissions. As a result, the UK government's Transport Decarbonisation Plan (TDP) sets the goal of achieving net zero emissions in the sector by 2050, making carbon pricing a central policy instrument. Yet, the policy raises concerns about regressive effects. Therefore, this paper analyzes the poverty effects of a carbon tax on transport fuels in the UK using household-level data. The analysis applies variants of a lump-sum refund, and based on the resulting income distributions, different poverty measures are computed. The paper advances standard poverty measurement methods using axiomatic analysis and does not rely on representative households. The inclusion of direct and indirect price effects—capturing price changes for the taxed good as well as for other goods where it serves as an intermediate input—through input–output analysis further aids a comprehensive assessment of overall distributional effects. I find that, contrary to popular belief, a higher lump-sum refund for disproportionately burdened rural households does not improve poverty levels significantly compared to a uniform refund. Yet, a dual-aspect lump-sum refund considering both rural–urban status and lower income brackets leads to lower poverty levels compared to the baseline scenario without a tax.