Can Carbon Taxes be Progressive?

by Makari Krause

Dissou et al. (2014) provide a new assessment of the incidence of carbon taxes and their impacts on inequality. Past studies on the impacts of carbon taxes have generally focused on the effects to commodity prices. This channel usually leads to the finding that carbon taxes are regressive because a carbon tax increases the price of energy-intensive goods and these goods make up the largest portion of the total goods bought by poorer households. Using only this one channel, however, overlooks a critical aspect of the tax; factor income, income generated from selling factors of production such as labor, is also affected by carbon taxes. Dissou et al. combine both the commodity price channel and the factor price channel to get a more comprehensive picture of the effects of a carbon tax on inequality and find that carbon taxes are not as regressive as previously thought. Continue reading

Reducing CO2 Emissions on the Electric Grid through a Carbon Disincentive Policy

by Stephanie Oehler

While energy production is widely acknowledged as a significant contributor to climate change, there is a discrepancy in opinion about what the most effective solution is to cut back on emissions. The most commonly addressed method of bringing about a smart grid is through new technologies that have the potential to improve distribution efficiency, encourage demand side management behaviors, and reduce the emissions associated with the production process. Policy change, however, is another route that has the potential to be more efficient in reducing emissions in the short term as technological developments are in progress. Li et al. (2013) examined the potential of several types of policy initiatives to modify electricity operator behavior in order to reduce CO2 emissions while continuing to meet energy demand. Basing their assumptions on the energy profile of Michigan, the authors created three models to represent different policy approaches: the first served as a baseline and represented the present energy cost and load distribution, the second imposed demand-side financial penalties for CO2 emissions, and the third created a carbon disincentive that produced a new pricing scheme for energy sources in terms of emissions. Continue reading