DISTRIBUTIONAL IMPLICATIONS OF A NATIONAL CO₂TAX IN THE U.S. ACROSS INCOME CLASSES AND REGIONS: A MULTI-MODEL OVERVIEW

Abstract

Clim. Change Econ. 2018.09. Downloaded from www.worldscientific.com by 54.191.190.102 on 05/11/18. For personal use only.This paper presents a multi-model assessment of the distributional impacts of carbon pricing. A set of harmonized representative CO 2 taxes and tax revenue recycling schemes is implemented in five large-scale economy-wide general equilibrium models. Recycling schemes include various combinations of uniform transfers to households and labor and capital income tax reductions. Particular focus is put on equity -the distribution of impacts across household incomes -and efficiency, evaluated in terms of household welfare. Despite important differences in the assumptions underlying the models, we find general agreement regarding the ranking of recycling schemes in terms of both efficiency and equity. All models identify a clear trade-off between efficient but regressive capital tax reductions and progressive but costly uniform transfers to households; all agree upon the inferiority of labor tax reductions in terms of welfare efficiency; and all agree that different combinations of capital tax reductions and household transfers can be used to balance efficiency and distributional concerns. A subset of the models go further and find that equity concerns, particularly regarding the impact of the tax on low income households, can be alleviated without sacrificing much of the double-dividend benefits offered by capital tax rebates. There is, however, less agreement regarding the progressivity of CO 2 taxation net of revenue recycling. Regionally, the models agree that abatement and welfare impacts will vary considerably across regions of the U.S. and generally agree on their broad geographical distribution. There is, however, little agreement regarding the regions which would profit more from the various recycling schemes.

The Impact of Carbon Taxation and Revenue Recycling on U.S. Industries

“…This is helpful guidance to policy makers, who might prefer to consider the level and allocation of carbon revenue separately. Given a tax trajectory to meet emissions abatement goals, policy makers can focus on recycling mechanism to address the economic consequences for certain sectors (e.g., EITE) and households (see Caron et al, 2018).…”

“…The main drawback to tax rebates is in the distribution of policy impacts. For capital tax recycling in particular, lower-income households tend to be disproportionately impacted by the policy (see Caron et al, 2018).…”

“…Measures such as GDP or household welfare can speak more directly to the policy costs borne by individual households (see Caron et al, 2018). General equilibrium welfare measures may still obscure significant economic impacts stemming from sectoral unemployment and labor market transitions, as general equilibrium representations of these economic phenomena are an active area of research.…”

Long-Term Distributional Impacts of European Cap-and-Trade Climate Policies: A CGE Multi-Regional Analysis

“…This indicates, that poorer households will have a higher propensity to reduce their emissions than richer as the carbon price will constitute a higher share of their budget. On the other hand, the results demonstrate that redistributing the revenues from carbon certificates in the same proportion that payments from government to households are made today to various income quintiles can work as a tool to decrease income inequality, as shown in references [15,17], because the poorer households derive a higher share of their income from government payments and would, therefore, observe higher gross income growth than richer households.…”

“…The efficiency loss could be reduced or even mitigated by applying appropriate fiscal policies such as the reduction of marginal tax rates on labor and capital, providing lump-sum transfers to households, or some combination of the above, depending upon the goals of the policymakers. Caron et al [15] provide a five-model assessment of distributional impacts of carbon pricing in the U.S. To alleviate distributional impacts on different households they evaluate the efficiency and equity (progressivity) of lump-sum household transfers, capital, and labor tax reductions. They find that lump-sum transfers to the household consumer are progressive, but come at the greatest costs, while capital tax reductions are mostly regressive and help the richest households.…”