Climate Change Is Regressive. A Carbon Tax Doesn’t Have To Be.

First published on ClimateProgress.org, a project of the Center for American Progress Action Fund, which was recently named one of Time magazine’s Top 25 blogs of 2010.

Climate change is innately regressive.

The wealthiest Americans contribute the most to carbon pollution, and yet the poor suffer the brunt of the impacts. Low-income families are more likely to live near crowded highways and dirty power plants, and they are also the least equipped to deal with loss and damage from severe weather or shocks to the food system. This is a market distortion: the costs of pollution are not borne entirely by the polluters. Thus, while a gallon of gas may cost $2.45 at the pump, the price jumps to $6.25 when factoring in health and environmental damages, according to a recent study from Duke University. Who pays the extra $3.80? We all do, but the very poor bear a disproportionate share of the burden.

Lawmakers could remedy this injustice by forcing the price of fossil fuels to tell the truth about their actual cost. That means accounting for the social cost of carbon. Among economists and a small but growing number of conservatives, a carbon tax stands as the carbon-pricing policy par excellence: simple, elegant, and absent the hard limits on pollution that Republicans tend to resist. The dilemma is that, depending on how it’s crafted, a carbon tax could actually make economic inequality worse.

A carbon tax can be regressive, but it doesn’t have to be

The beauty of a carbon tax is that it discourages high-carbon behavior. If the cost of gasoline goes up, consumers are more likely to purchase a fuel-efficient vehicle. If the cost of electricity goes up, homeowners are more likely to put up solar panels or conserve energy. However, because we need energy to produce everything from TVs to hamburger buns, the increased cost of production will drive up the price of consumer goods or suppress wages. Either way, low-income families, who already spend a larger proportion of their income on transportation, groceries and utility bills, will be hit the hardest.

That’s not to say a carbon tax couldn’t be made to work for struggling families. With a revenue-neutral carbon tax, the federal government would return the proceeds to the taxpayers, and how lawmakers go about recycling the proceeds could make the difference between narrowing and widening the wealth gap. At an event sponsored by Resources for the Future, an environmental think tank, Dr. Roberton Williams said “The carbon tax by itself is regressive, but what you do with revenue is much more important. So, we can easily take a regressive policy and turn it progressive by how we use the revenue.”

Cutting the corporate tax would be efficient, but it would hurt low-income households

One way to return carbon tax revenue would be to cut the corporate income tax (“capital recycling”). Because a corporate income tax can discourage business investment, returning revenue to corporations could provide a powerful stimulus to the economy, more than other kinds of tax cuts. Unfortunately, most of the gains would go to the wealthiest Americans. Said Williams, “The case that is the best for the economy as a whole, capital tax recycling, is the worst for the middle class.” Think of it this way: If Bill Gates walks into a football stadium, every person in the stadium may be a million dollars richer on average, but that doesn’t translate into real wealth for anyone except for a single billionaire. The point is, distribution matters.

Cutting the the payroll tax (“labor recycling”) would be more equitable than cutting the corporate income tax, but even in this scenario the poorest Americans would be worse off than they would without a carbon tax. Writing in Resources magazine, Chad Stone, Chief Economist at the Center on Budget and Policy Priorities, notes, “A carbon tax should not make poor families poorer or push more people into poverty. Climate rebates should be designed to fully offset the impact of a carbon tax on the purchasing power of low- and moderate-income households.”

A lump-sum rebate is less efficient, but low- and middle-income families would be better off

So, what is a fairer way to return revenue from a carbon tax? Take the total accumulated revenue, divide it into 310 million equal shares, and mail a check to every American. This is what’s commonly known as “fee and dividend.” Said Williams, “The lump sum rebate — that just does an enormous amount for the bottom end. Again, because that flat dollar amount is a much bigger percentage amount for poorer people than it is for wealthy people.” The lump-sum rebate turns the Bill Gates-football stadium analogy on its head. With a rebate, the average wealth of stadium goers decreases, but most of the losses come from the pockets of a singular tech tycoon.

This graph shows the net effect on income of a revenue-neutral carbon tax of $30 per ton of CO2.

As you can see, the lump-sum rebate is the only scenario in which those who have contributed the least to carbon pollution — low- and middle-income Americans — are actually better off. Because the wealthiest Americans bear more of the economic brunt, a rebate would have a redistributive effect, simultaneously delivering blows to carbon pollution and economic inequality.

Crafting fair and effective climate policy is hard, but even imperfect policy will help struggling families

Here’s the bottom line: a carbon tax can be regressive, but it doesn’t have to be. It all depends on how badly the policy is mangled (or not) by the policymakers. As David Roberts points out, a carbon tax could be rendered unfair and ineffective in myriad ways, but no climate policy is without its pitfalls. Any attempt to deal with the climate crisis can be easily corrupted by incompetent policymakers and corporate interests. A carbon tax is just one possible (and possibly treacherous) path to a low-carbon future. But, because climate change is itself regressive, any effort to deal with carbon pollution, however imperfectly, will prove vital to protecting the poorest and most vulnerable among us.

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