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Protecting the Poor With a Carbon Tax
Gilbert E. MetcalfDepartment of Economics
Tufts University
Friedrich Ebert FoundationFinancing for Development Office
UN-DESAJune 17, 2008
Reducing Greenhouse Gas Emissions
• Many policy approaches to reducing GHG emissions– Carbon Tax– Cap and Trade Systems– Regulatory Approaches
• All raise the cost of energy use
• Concern about price impact on poor
Tax Burden
• A tax is regressive if it takes a larger share of income from the poor than from the rich
• A tax is progressive if it takes a larger share of income from the rich than from the poor
Concerns with a Carbon Tax
• Any carbon price will disproportionately impact the poor– Carbon tax is essentially an energy tax– Energy a larger share of household budget in
poor households
• A regressive tax
• This is a problem with cap and trade systems as well as a tax
Advantages of a Carbon Tax
• Relatively easy to implement– In major GHG emitting countries, bulk of
emissions from fossil fuel use
• Price impact is known with certainty– Impact determined by tax rate
• Transparent– No hidden transfers
Distributional Impacts Can Be Mitigated
• Carbon tax may be regressive
• A carbon tax reform need not be regressive– Use carbon tax revenue to offset the impact
on poor households
Example From the United States
• $15 per ton CO2 tax on carbon emissions
• Environmental Earned Income Tax Credit– A tax credit equal to 15 percent of wage
income up to $560 (using 2003 data)– Credit provided to all workers in family
How the Credit Works
• Household A has two workers that earn $10,000 and $3,000 respectively– Workers receive credit of $560 and $450 respectively– Credit equal to 7.8 percent of income
• Household B has two workers that earn $45,000 and $20,000 respectively– Workers receive credit of $560 each– Credit equal to 1.7 percent of income
• Credit is progressive – more valuable to poor households than rich households
Who Pays the Carbon Tax?
3.6
3.1
2.4
2.01.8
1.51.4 1.2
1.00.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1 2 3 4 5 6 7 8 9 10
Decile
Per
cent
age
of I
ncom
e
Metcalf (2007)
Who Gets the Environmental Earned Income Tax Credit?
2.7
2.1 2.2 2.11.9 1.8
1.61.4
1.10.8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1 2 3 4 5 6 7 8 9 10
Decile
Per
cent
age
of I
ncom
e
Metcalf (2007)
Net Burden
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
1 2 3 4 5 6 7 8 9 10
Decile
Per
cent
age
of I
ncom
e
Metcalf (2007)
Net Burden
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
1 2 3 4 5 6 7 8 9 10
Decile
Per
cent
age
of I
ncom
e
Explicit grant to elderly non-workers
Source: Metcalf (2007)
Giving Permits to the Energy Sector
2.0
0.7 0.60.4 0.5 0.4
0.3 0.2
-0.2-0.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
1 2 3 4 5 6 7 8 9 10
Decile
Per
cent
age
of I
ncom
e
Free allocation precludes the
opportunity for distributional offsets
Metcalf (2007)
Rebating the Tax
• The approach described here is designed to lower the marginal tax rate on wage income
• This provides some efficiency benefits
• A per capita rebate would be even more progressive
• Trade-off between efficiency and equity
Applying This Concept in Developing Countries
• Carbon tax can be collected at the national or sub-national level
• A carbon tax dividend can be provided to each household based on family size
• No need to verify family income or measure energy consumption
Summing Up
• A carbon tax may be regressive
• A carbon tax reform can be distributionally neutral
• How the carbon tax revenue gets used is crucial for distributional considerations
• Carbon tax revenue can offset the impacts on poor households
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