Household Distributional and Revenue Recycling Effects of the Carbon Price in Australia

Abstract

The Australian Government introduced a carbon tax from 1 July 2012. The then opposition party leader, now Prime Minister, introduced legislation to repeal the tax. Amongst the many issues being debated is that of the incidence of the tax. In this study, we explore household consumption and income changes arising from a A$23 carbon price employing a computable general equilibrium model (entitled A3E-G). The model has been calibrated using a social accounting matrix database of Australia with 10 household income groups. This carbon price generates A$6.39 billion revenue while reducing Australia's carbon emissions by 11%. The empirical evidence suggests household level impacts range from proportional to mildly progressive tax incidence. In this study, we propose four revenue recycling options to overcome any undesirable distributional effects from the carbon price. Results indicate that revenue recycling through income tax reductions and uniform lump sum transfers improves post tax income levels and welfare towards middle and high income groups. A nonuniform lump sum transferring option favors low income households. Uniform reductions in commodity tax rates are not found to be welfare improving but we find positive impacts on export competitiveness from this option.

Distributional impact of carbon pricing in Chinese provinces

“…show that taxing carbon in certain developed countries/regions may be neutral (Symons et al, 2000;Creedy and Sleeman, 2006) or weakly progressive (Tiezzi, 2005;Oladosu and Rose, 2007;Sajeewani et al, 2015), more studies show that without carbon revenue recycling, a CT policy is regressive in most cases (Speck, 1999;Baranzini et al, 2000;Brännlund and Nordström, 2004;Wier et al, 2005;Kerkhof et al, 2008;Callan et al, 2009;Feng et al, 2010;Bureau, 2011;IPCC, 2014;Mathur and Morris, 2014). Regressivity means that the cost of a carbon tax to the income or welfare of lower income groups is higher than the higher income groups, or in other words, the burden of carbon pricing on the poor is higher than on the rich.…”

Carbon taxes and the double dividend hypothesis in a recursive-dynamic CGE model for Spain

“…There is large body of literature on the best option for recycling the revenues generated by environmental taxes. Most studies suggest that recycling these revenues through lowering distortionary taxes is more efficient than returning them via lump-sum transfers to households or other economic agents (Bohm, 1997;McKitrick, 1997;Kemfert and Welsch, 2000;Carbone et al, 2013;Jorgenson et al, 2013;Sajeewani et al, 2015).…”

“…Given the power and flexibility that CGE methods provide, they have been used since the 1990s to study the DD hypothesis with different kind of taxes on different economic systems, including carbon taxes. Jorgenson et al (2013) found a DD for the United States by recycling revenues from a carbon tax into capital taxes; Meng et al (2013) found no DD for Australia for a carbon tax; Allan et al (2014) found a DD for Scotland by recycling revenues from a carbon tax into labor taxes; Chisari and Miller (2015) found a DD for Argentina, Brazil, Chile, El Salvador, Jamaica, and Peru by recycling revenues from a carbon tax into labor taxes; Sajeewani et al (2015) found a DD for Australia for a carbon tax when revenues were recycled into labor taxes; and Othman (2017), Pereira et al (2016), and Zhang et al (2016), who all applied the model to China, did not find a DD for a carbon tax. These different results from the various models are not unusual given how they may differ along many dimensions -country, period, source of data, functional forms, substitution elasticities and other parameter values, factor mobility and market structure, etc.…”

Environmental Fiscal Reform and the Double Dividend: Evidence from a Dynamic General Equilibrium Model

“…The literature discusses the best option for recycling the revenues generated by environmental taxes. Most studies suggest that recycling them through lowering distortionary taxes is more efficient than returning them via lump-sum transfers to households or other economic agents [14,21,[48][49][50][51].…”