Distributional Implications of Carbon Taxation: Lessons from British Columbia
Tiemroth, Henrik J.
2020
- Carbon taxation is widely favored by economists as the most efficient policy to mitigate the economic damage of anthropogenic climate change. Actual implementation of the policy, however, has been limited, due in part to political opposition rooted in a commonly held belief that the tax is regressive. In this paper, I conduct a distributional analysis of British Columbia’s $30/ton CO2 eq carbon ... read moretax to test this claim of regressivity. I simulate the imposition of the carbon tax with a Leontief input-output model of the British Columbia provincial economy and incorporate general equilibrium effects to factor prices using macroeconomic estimates from a computable general equilibrium model. I then apply the estimated increases in consumer prices to household-level microdata on income and expenditure to calculate the total incidence to each household as a result of the tax and compare five different policy designs to analyze their distributional impact: 1) no rebate of revenues, 2) a flat per-household rebate, 3) a rebate based on household capital income, to model a corporate tax cut 4) a rebate based on household earned income, to model an income tax cut and 5) a rebate based on transfer income, to model an enhancement of welfare programs. I also analyze the dispersion of incidence within income groups under each rebate policy and test different potential sources of heterogeneity. I find that, in the absence of revenue considerations, the tax has no statistically-significant trend in incidence with regard to income. However, once the use of the revenues is considered, the manner in which the revenues are returned determines the distributional impact of the policy. I find that the transfer-based rebate is the more progressive with respect to income than the flat rebate, suggesting it is the optimal policy for satisfying vertical equity considerations, while the wage and capital rebate policies are regressive. I also find that the flat rebate produces the lowest level of heterogeneity in incidence, suggesting it is the optimal policy for horizontal equity. I also consider some potential political advantages or disadvantages of each rebate scheme based on their respective distributional impacts.read less
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