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The Initial Incidence of a Carbon Tax Across Income Groups

Author

Listed:
  • Roberton C. Williams III
  • Hal Gordon
  • Dallas Burtraw
  • Jared C. Carbone
  • Richard D. Morgenstern

Abstract

Carbon taxes efficiently reduce greenhouse gas emissions, but are criticized as regressive. This paper links dynamic overlapping-generation and micro-simulation models of the United States to estimate the initial incidence of carbon taxes. We find that while carbon taxes are regressive, incidence depends much more on how carbon tax revenue is used. Recycling revenues to cut capital taxes is efficient but exacerbates regressivity. Lump sum rebates are less efficient, but much more progressive, benefitting the three lower income quintiles even when ignoring environmental benefits. A labor tax swap represents an intermediate option, as it is more progressive than a capital tax swap and more efficient than a rebate.

Suggested Citation

  • Roberton C. Williams III & Hal Gordon & Dallas Burtraw & Jared C. Carbone & Richard D. Morgenstern, 2015. "The Initial Incidence of a Carbon Tax Across Income Groups," National Tax Journal, National Tax Association;National Tax Journal, vol. 68(1), pages 195-214, March.
  • Handle: RePEc:ntj:journl:v:68:y:2015:i:1:p:195-214
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    References listed on IDEAS

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    1. Burtraw, Dallas & Sweeney, Richard & Walls, Margaret, 2009. "The Incidence of U.S. Climate Policy: Alternative Uses of Revenues From a Cap-and-Trade Auction," National Tax Journal, National Tax Association;National Tax Journal, vol. 62(3), pages 497-518, September.
    2. Matthew Riddle & James Boyce, 2007. "Cap and Dividend: How to Curb Global Warming while Protecting the Incomes of American Families," Working Papers wp150, Political Economy Research Institute, University of Massachusetts at Amherst.
    3. Kevin A. Hassett & Aparna Mathur & Gilbert E. Metcalf, 2009. "The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 155-178.
    4. Fullerton Don & Heutel Garth, 2011. "Analytical General Equilibrium Effects of Energy Policy on Output and Factor Prices," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-26, January.
    5. Roberton C. Williams III, 2011. "Setting the Initial Time-Profile of Climate Policy: The Economics of Environmental Policy Phase-Ins," NBER Chapters,in: The Design and Implementation of U.S. Climate Policy, pages 245-254 National Bureau of Economic Research, Inc.
    6. Don Fullerton & Garth Heutel & Gilbert E. Metcalf, 2012. "Does the Indexing of Government Transfers Make Carbon Pricing Progressive?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 94(2), pages 347-353.
    7. Rausch, Sebastian & Metcalf, Gilbert E. & Reilly, John M., 2011. "Distributional impacts of carbon pricing: A general equilibrium approach with micro-data for households," Energy Economics, Elsevier, vol. 33(S1), pages 20-33.
    8. Parry Ian W. H. & Williams Roberton C., 2010. "What are the Costs of Meeting Distributional Objectives for Climate Policy?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 10(2), pages 1-35, December.
    9. Parry, Ian W. H. & Williams, Roberton III & Goulder, Lawrence H., 1999. "When Can Carbon Abatement Policies Increase Welfare? The Fundamental Role of Distorted Factor Markets," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 52-84, January.
    10. Corbett A. Grainger & Charles D. Kolstad, 2010. "Distribution and Climate Change Policies," Chapters,in: Climate Change Policies, chapter 7 Edward Elgar Publishing.
    11. Parry, Ian W.H. & Williams, Roberton C. III, 2010. "What Are the Costs of Meeting Distributional Objectives in Designing Domestic Climate Policy?," Discussion Papers dp-10-51, Resources For the Future.
    12. Rausch, Sebastian, 2013. "Fiscal consolidation and climate policy: An overlapping generations perspective," Energy Economics, Elsevier, vol. 40(S1), pages 134-148.
    13. Lawrence Goulder, 1995. "Environmental taxation and the double dividend: A reader's guide," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 2(2), pages 157-183, August.
    14. Dinan, Terry & Rogers, Diane Lim, 2002. "Distributional Effects of Carbon AllowanceTrading: How Government Decisions Determine Winners and Losers," National Tax Journal, National Tax Association, vol. 55(N. 2), pages 199-221, June.
    15. Dallas Burtraw & Samantha Sekar, 2014. "Two world views on carbon revenues," Journal of Environmental Studies and Sciences, Springer;Association of Environmental Studies and Sciences, vol. 4(1), pages 110-120, March.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Breton, Michèle & Mirzapour, Hossein, 2016. "Welfare implication of reforming energy consumption subsidies," Energy Policy, Elsevier, vol. 98(C), pages 232-240.
    2. Roberton C. Williams III, 2016. "Environmental Taxation," NBER Working Papers 22303, National Bureau of Economic Research, Inc.
    3. Arik Levinson, 2017. "Energy Efficiency Standards Are More Regressive Than Energy Taxes: Theory and Evidence," Working Papers gueconwpa~17-17-01, Georgetown University, Department of Economics.
    4. William A. Pizer & Steven Sexton, 2017. "Distributional Impacts of Energy Taxes," NBER Working Papers 23318, National Bureau of Economic Research, Inc.
    5. Julie-Anne Cronin & Don Fullerton & Steven Sexton, 2017. "Vertical and Horizontal Redistributions from a Carbon Tax and Rebate," CESifo Working Paper Series 6373, CESifo Group Munich.
    6. repec:red:issued:16-217 is not listed on IDEAS
    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. repec:bla:coecpo:v:36:y:2018:i:1:p:149-166 is not listed on IDEAS
    10. Klenert, David & Mattauch, Linus & Combet, Emmanuel & Edenhofer, Ottmar & Hepburn, Cameron & Rafaty, Ryan & Stern, Nicholas, 2017. "Making Carbon Pricing Work," MPRA Paper 80943, University Library of Munich, Germany.
    11. repec:eee:enepol:v:109:y:2017:i:c:p:590-600 is not listed on IDEAS
    12. Arik Levinson, 2016. "Energy Efficiency Standards Are More Regressive Than Energy Taxes: Theory and Evidence," NBER Working Papers 22956, National Bureau of Economic Research, Inc.
    13. repec:eee:eecrev:v:96:y:2017:i:c:p:1-17 is not listed on IDEAS
    14. Karp, Larry & Rezai, Armon, 2017. "Asset prices and climate policy," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt6fx579fp, Department of Agricultural & Resource Economics, UC Berkeley.
    15. Gordon, Hal & Burtraw, Dallas & Williams, Roberton, 2015. "A Microsimulation Model of the Distributional Impacts of Climate Policies," Discussion Papers dp-14-40, Resources For the Future.
    16. Lucas W. Davis & Christopher R. Knittel, 2016. "Are Fuel Economy Standards Regressive?," NBER Working Papers 22925, National Bureau of Economic Research, Inc.
    17. Stephie Fried & Kevin Novan & William Peterman, 2018. "The Distributional Effects of a Carbon Tax on Current and Future Generations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 30, pages 30-46, October.
    18. repec:eee:jeeman:v:89:y:2018:i:c:p:136-152 is not listed on IDEAS

    More about this item

    JEL classification:

    • H22 - Public Economics - - Taxation, Subsidies, and Revenue - - - Incidence
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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