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