Protecting the Poor With a Carbon
Tax
Gilbert E. Metcalf
Department of Economics
Tufts University
Friedrich Ebert Foundation
Financing for Development Office
UN-DESA
June 17, 2008
Reducing Greenhouse Gas
Emissions
• Many policy approaches to reducing GHG
emissions
– Carbon Tax
– Cap and Trade Systems
– Regulatory Approaches
• All raise the cost of energy use
• Concern about price impact on poor
Tax Burden
• A tax is regressive if it takes a larger share
of income from the poor than from the rich
• A tax is progressive if it takes a larger
share of income from the rich than from
the poor
Concerns with a Carbon Tax
• Any carbon price will disproportionately
impact the poor
– Carbon tax is essentially an energy tax
– Energy a larger share of household budget in
poor households
• A regressive tax
• This is a problem with cap and trade
systems as well as a tax
Advantages of a Carbon Tax
• Relatively easy to implement
– In major GHG emitting countries, bulk of
emissions from fossil fuel use
• Price impact is known with certainty
– Impact determined by tax rate
• Transparent
– No hidden transfers
Distributional Impacts Can Be
Mitigated
• Carbon tax may be regressive
• A carbon tax reform need not be
regressive
– Use carbon tax revenue to offset the impact
on poor households
Example From the United States
• $15 per ton CO2 tax on carbon emissions
• Environmental Earned Income Tax Credit
– A tax credit equal to 15 percent of wage
income up to $560 (using 2003 data)
– Credit provided to all workers in family
How the Credit Works
• Household A has two workers that earn $10,000
and $3,000 respectively
– Workers receive credit of $560 and $450 respectively
– Credit equal to 7.8 percent of income
• Household B has two workers that earn $45,000
and $20,000 respectively
– Workers receive credit of $560 each
– Credit equal to 1.7 percent of income
• Credit is progressive – more valuable to poor
households than rich households
Who Pays the Carbon Tax?
4.0
3.6
Percentage of Income
3.5
3.1
3.0
2.4
2.5
2.0
1.8
2.0
1.5
1.5
1.4
1.2
1.0
1.0
0.8
0.5
0.0
1
Metcalf (2007)
2
3
4
5
6
Decile
7
8
9
10
Who Gets the Environmental
Earned Income Tax Credit?
4.0
Percentage of Income
3.5
3.0
2.7
2.5
2.1
2.2
2.1
2.0
1.9
1.8
1.6
1.5
1.4
1.1
0.8
1.0
0.5
0.0
1
Metcalf (2007)
2
3
4
5
6
Decile
7
8
9
10
Net Burden
4.0
Percentage of Income
3.0
2.0
1.0
0.0
1
2
3
4
5
6
-1.0
-2.0
Metcalf (2007)
Decile
7
8
9
10
Net Burden
4.0
Explicit grant to
elderly non-workers
Percentage of Income
3.0
2.0
1.0
0.0
1
2
3
4
5
6
-1.0
-2.0
Source: Metcalf (2007)
Decile
7
8
9
10
Giving Permits to the Energy
Sector
4.0
Free allocation
precludes the
opportunity for
distributional offsets
3.5
Percentage of Income
3.0
2.5
2.0
2.0
1.5
0.7
1.0
0.6
0.5
0.4
0.5
0.4
4
5
6
0.3
0.2
7
8
0.0
-0.5
1
2
3
-1.0
Metcalf (2007)
Decile
9
-0.2
10
-0.5
Rebating the Tax
• The approach described here is designed
to lower the marginal tax rate on wage
income
• This provides some efficiency benefits
• A per capita rebate would be even more
progressive
• Trade-off between efficiency and equity
Applying This Concept in
Developing Countries
• Carbon tax can be collected at the national
or sub-national level
• A carbon tax dividend can be provided to
each household based on family size
• No need to verify family income or
measure energy consumption
Summing Up
• A carbon tax may be regressive
• A carbon tax reform can be distributionally
neutral
• How the carbon tax revenue gets used is
crucial for distributional considerations
• Carbon tax revenue can offset the impacts
on poor households