Study Shows Low-Income Households Not Impacted by Carbon Fee

The word “bandwagon” is probably too strong at this point, but the more that people scrutinize carbon fees, the better they look and the broader the support they have. Some skeptics have claimed that a fee, because it would be passed along, would hurt those with low or modest incomes. True, it is regressive, but there are simple ways to reimburse those who are most vulnerable.

An analysis shows that price hikes resulting from taxing emissions could be completely offset for low- and moderate-income households, said Roberton Williams III, an economist at the University of Maryland. "The lump sum rebate is more than enough to compensate them," he said at a September 22 event organized by Resources for the Future and reported on by Evan Lehmann in E&E Reporter.

"The carbon tax by itself is regressive," Williams said. "But what you do with the revenue is much more important. So we can easily take a regressive policy [and] turn it progressive by how we use the revenue."

Almost any nationwide program to reduce carbon consumption runs the risk of forcing those on the bottom half of the economic ladder to shoulder more than their fair share of the burden. One example: appliance standards. Another: the EPA’s Clean Power Plan. Adele Morris, an economist at the Brookings Institution. noted that the EPA program cannot address how people with different income levels are affected. "So I would say right off the bat one advantage of doing a carbon tax over what we're doing now is our ability exactly to engage in these kinds of policy measures to ensure that we've done no harm," she said at the RFF event.

The E&E Reporter story noted that Chad Stone, chief economist for the Center on Budget and Policy Priorities, recently outlined ways that the government could identify 95 percent of all Americans in order to give them a carbon rebate check.

"Well-designed carbon tax legislation can generate enough revenue to fully offset the hit to the most vulnerable households' budgets from higher energy prices," Stone said. "It can cushion the impact for many other households, and it can leave plenty to spare for other uses, whether deficit reduction, tax reform or spending for other public purposes. That's the motivating thought to keep in mind."

Most models indicate that for every dollar of a carbon fee in this country, the price of a gallon of gasoline would rise by just under a penny. So a $30 fee would translate to less than 30 cents at the pump.

Assuming that a third to a half of the fee’s sizable revenue goes to low- and middle-income Americans, where should the rest go? We propose that half of the money be used to reduce the corporate tax rate from 35 percent (the highest in the industrialized world) to 25 percent. In recent years, Japan, Canada, and the United Kingdom have reduced their top rate to keep companies from moving jobs and factories to lower-cost countries.

Even though the carbon fee is economists’ runaway favorite among ways to tackle climate change, some people wonder if it would work in the real world—and how it would affect a nation’s economy.  Here’s an excerpt from an August 25 New Yorker article by Elizabeth Kolbert:

Sweden, one of the few countries that tax carbon, has reduced its emissions by about twenty-three per cent in the past twenty-five years. During that same period, its economy has grown by more than fifty-five per cent. Last year, perhaps for the first time since the invention of the steam engine, global emissions remained flat even as the global economy grew, by about three per cent.

“We’re not moving fast enough” (to combat climate change), President Obama said in August. The quickest and most efficient—and fairest--option for solving this problem is a carbon fee. And it offers Congress an opportunity to make U.S. companies more competitive at the same time.