Carbon Pricing Myths: Part 2. A Carbon Fee is Regressive, Hitting Lower-Income People Hardest

Putting a price on carbon would make gasoline, home heat and air conditioning, and carbon-intensive products (e.g. steel and cement) more expensive. Those at the upper end of the income ladder generally spend more on such items. For example, for every gallon of gasoline used by the poorest 20 percent of households, the richest 20 percent use three or four. But those with lower incomes spend a higher percentage of their income on these items. (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.)

That burden can be eased, however, or even eliminated. Congress can make the fee revenue-neutral, taking advantage of the proceeds to reduce taxes and achieve other goals. The revenue would be significant, and some of it could be used to compensate low- and middle-income households.  

"Well-designed carbon tax legislation can generate enough revenue to fully offset the hit to the most vulnerable households' budgets from higher energy prices," according to Chad Stone, chief economist for the Center on Budget and Policy Priorities. "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."

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: 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," Morris said at a Resources for the Future event in September 2015.

What if we fail to reduce our carbon use and thereby allow our planet’s climate to continue to change? We could face even greater sea level rise, more stresses on drinkable water and the food supply, and more super-storms like Hurricane Katrina. The most vulnerable are the poor, so inaction would be truly regressive.