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Can pollution tax rebates protect low-wage earners?

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  • Fullerton, Don
  • Monti, Holly

Abstract

Pollution taxes are believed to burden low-income households that spend a greater than average share of income on pollution-intensive goods. Some proposals offset that effect by returning revenue to low-income workers via reduced labor tax. We build analytical general equilibrium models with both high-skilled and low-skilled labor, and we solve for the change in real net wage of each group. Decomposition shows the separate effects of the tax rebate, higher product prices, and the changes in relative wage rates. We also include numerical examples. Even though the pollution tax injures both types of labor, in most cases we find that returning all of the revenue to low-skilled workers is still not enough to offset higher product prices. Changes in relative wage rates may further hurt low-skilled labor. Protecting low-income workers is possible in this model only if they are defined as those below a relatively low wage threshold, but we discuss many possible elaborations of this model that could affect those results.

Suggested Citation

  • Fullerton, Don & Monti, Holly, 2013. "Can pollution tax rebates protect low-wage earners?," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 539-553.
  • Handle: RePEc:eee:jeeman:v:66:y:2013:i:3:p:539-553
    DOI: 10.1016/j.jeem.2013.09.001
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    References listed on IDEAS

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    Cited by:

    1. repec:cup:endeec:v:22:y:2017:i:06:p:725-746_00 is not listed on IDEAS
    2. Bas (B.) Jacobs & Rick (F.) van der Ploeg, 2017. "Should Pollution Taxes Be Targeted At Income Redistribution?," Tinbergen Institute Discussion Papers 17-070/VI, Tinbergen Institute.
    3. Philippe Bontems & Estelle Gozlan, 2018. "Trade, environment, and income inequality: An optimal taxation approach," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 20(4), pages 557-581, August.
    4. Zhang, Zengkai & Zhang, Zhongxiang, 2017. "Intermediate input linkage and carbon leakage," Environment and Development Economics, Cambridge University Press, vol. 22(06), pages 725-746, December.
    5. Klenert, David & Mattauch, Linus, 2016. "How to make a carbon tax reform progressive: The role of subsistence consumption," Economics Letters, Elsevier, vol. 138(C), pages 100-103.
    6. Farrell, Niall, 2017. "What Factors Drive Inequalities in Carbon Tax Incidence? Decomposing Socioeconomic Inequalities in Carbon Tax Incidence in Ireland," Ecological Economics, Elsevier, vol. 142(C), pages 31-45.
    7. Diane Aubert & Mireille Chiroleu-Assouline, 2017. "Environmental Tax Reform and Income Distribution with Imperfect Heterogeneous Labor Markets," PSE Working Papers halshs-01550000, HAL.
    8. Rausch, Sebastian & Schwarz, Giacomo A., 2016. "Household heterogeneity, aggregation, and the distributional impacts of environmental taxes," Journal of Public Economics, Elsevier, vol. 138(C), pages 43-57.
    9. Valentina Bosetti & Marco Maffezzoli, 2013. "Taxing Carbon under Market Incompleteness," Working Papers 2013.72, Fondazione Eni Enrico Mattei.
    10. Karney, Daniel H., 2016. "General equilibrium models with Morishima elasticities of substitution in production," Economic Modelling, Elsevier, vol. 53(C), pages 266-277.
    11. Qian Wang & Qiao-Mei Liang, 2015. "Will a carbon tax hinder China’s efforts to improve its primary income distribution status?," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 20(8), pages 1407-1436, December.

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