Regional disparities would be small, according to most studies in recent years. “We … find that the regional variation is at best modest,” wrote economists Kevin A. Hassett, Aparna Mathur and Gilbert E. Metcalf in “The Incidence of a U.S. Carbon Tax: A Lifetime and Regional Analysis,” a January 2008 working paper by the American Enterprise Institute (AEI). They concluded that “variation across regions is sufficiently small that one could argue that a carbon tax is distributionally neutral across regions.”
The AEI study used the household as the unit of consumption and considered the lifetime incidence of the tax, which they assumed to be $15 per metric ton of CO2, imposed upstream. They examined both the direct component (the increased cost of gasoline, home heating and electricity) and the indirect component (the increased cost of other goods, ranging from air travel to food purchases, resulting from the higher cost of fuel used in their provision).
These economists calculated that the largest variation between regions was less than 0.37% of household income. Based on U.S. Census Bureau data on median U.S. household income, the 0.37% difference represents a difference of just $178 per year between typical households in the most affected and the least affected regions. The average interregional difference is much less.
“Regional differences in the effects of a carbon tax are small,” according to a 2013 Resources for the Future (RFF) study by Daniel F. Morris and Clayton Munnings, “Designing a Fair Carbon Tax.”
“The electricity sector will most prominently exhibit regional disparities in price increases,” Morris and Munnings reported. “Areas of the country that depend more on fossil fuel for electricity production will see greater price increases than areas that use renewable sources or nuclear power. But those regions that are more reliant on fossil fuel currently pay less in electricity prices, so research suggests that a carbon tax will result in a price flattening across the nation.
“Although this is the case for electricity prices, a carbon tax may affect the price of other types of energy—such as gasoline and home heating oil—differently across the country. Despite that, it may have similar effects on household income in different regions. A 2012 study conducted by RFF researchers Karen Palmer, Anthony Paul, and Matthew Woerman found that the tax burden for average households clusters around 1.5 percent of annual income, despite the fact that regions consume energy differently. For example, Appalachia spends more on gasoline than New England, where households spend more on heating oil. This suggests that although energy consumption of specific fuels varies by region, overall energy consumption is such that the carbon tax does not significantly disadvantage households in any specific region.”
“Large regional differences do not show up for average households but do exist for lower-income households,” according to another RFF study, “The Incidence of U.S. Climate Policy: Alternative Uses of Revenues from a Cap-and-Trade Auction” (April 2009). Dallas Burtraw, Richard Sweeney, and Margaret Walls broke the country into 11 regions and examined the likely income and distributional effects of a cap-and-trade system that resulted in a price of $20 per ton of CO2.
They found that “putting a price on CO2 emissions can distribute costs unevenly across income groups and regions, and that revenue allocation decisions can either temper or exacerbate these distributional effects.”
Metcalf, a Tufts University professor and one of the authors of the AEI study cited above, suggested one way to reduce such differences. For instance, if households in the Northwest would indeed pay less in carbon taxes than the national average, individuals or households in that region would receive smaller tax reductions. Households in the Plains states, if they were paying more than the average, could receive a larger reimbursement. Such a system would make a revenue-neutral carbon tax regional-neutral as well.
A January 2016 World Resources Institute issue brief by Noah Kaufman, Michael Obeiter, and Eleanor Krause backed up these earlier studies and noted that the revenue stream generated by a carbon fee would be “a powerful tool” to cure uneven regional impacts.
While most of the analysis of a carbon fee’s regional impact has dealt with consumption of carbon, it is important to note that coal workers and coal-reliant communities would be vulnerable, and they are clustered in places such as the Northern Rockies and Appalachia. Of course, they are at risk no matter which policy is adopted to counter climate change. One advantage of a carbon fee is that it would raise revenue that Congress could appropriate to assist in their transition, which regulatory programs do not.
“Softening the blow to lower-income households and the transitory burden on coal workers and their communities makes sense on both policy and political grounds,” according to Donald Marron and Adele Morris in a February 2016 Tax Policy Center report, “How to Use Carbon Tax Revenues.”
“Doing so will reduce opposition to a tax, both before and after enactment, and will leave substantial revenues that can be used for other purposes.” They estimated that providing assistance to the roughly 80,000 American coal workers and their communities for a decade would cost “a tiny share of the $1 trillion or more that a tax could bring in over the same period.”