Putting a price on carbon is a reliable and cost-effective approach to reducing heat-trapping greenhouse gas emissions. It spurs investments in clean energy technologies and it produces a stream of revenue that can be used in productive ways. No wonder it is increasingly popular — a recent poll found that nearly seven of 10 Americans support a carbon tax.
Despite these benefits, some oppose carbon taxes on the grounds that they disproportionately hurt poor and middle-class households. After all, the critics say, lower-income households spend a higher percentage of their budgets on energy than rich ones do, and the price of energy produced from carbon-intensive fuels is likely to rise.
However, research from World Resources Institute shows that putting a price on carbon — with either a carbon tax or a cap-and-trade program — does not inherently help or hurt lower-income households (it is neither progressive or regressive, in economist-speak). Instead, it depends on how the policy is designed. We found that if a portion of the carbon pricing revenue is dedicated to helping the poor and middle class, these households are likely to be better off than they would be under alternative policy pathways. Specifically, a small portion of the revenue (perhaps 10 percent) would be sufficient to protect poor households from increasing energy prices, leaving the bulk of the revenue for other productive uses, such as supporting the middle class, spurring clean energy innovation, and promoting economic growth.
This concept is getting a real-world airing this year, as voters in Washington State will consider Initiative 732, which would establish the first economy-wide state carbon tax in the United States. Predictably, critics have claimed that Initiative 732 would “disproportionately impact low income people” and “make Washington’s regressive tax system … even more regressive.”
In fact, the Washington state carbon tax is designed to make the state’s tax system more progressive. Most of the tax revenue would be used to fund a reduction in the state’s sales tax. This would provide a boost for middle-class households, which spend a greater proportion of their income on sales taxes than wealthy households (because the rich devote more of their income to savings, services and out-of-state purchases).
On top of that, about 15 percent of the carbon tax revenue is specifically targeted to benefit the poor through a state-level match of the federal Earned Income Tax Credit, which subsidizes the wages of low-income households. The EITC a is rare anti-poverty measure with bipartisan support, expanded by every president since Gerald Ford and supported by President Obama and House Speaker Paul Ryan. The Washington State EITC expansion would provide a significant tax break for hundreds of thousands of low-wage workers and their families.
Far from being a regressive levy that hurts those who can least afford it, the Washington State carbon tax is crafted to help those who need it most.
Progressive carbon pricing policies are already in place around the United States and the world. Across the Canadian border in British Columbia, for example, about 15 percent of carbon tax revenues are directed to poor households in the form of a Low Income Climate Action Tax Credit, and the remainder is used to fund reductions in other taxes. A recent study of the British Columbia policy found it has led to increased income for the 40 percent of the population at the bottom of the income scale, even before accounting for the benefits from reduced emissions. California’s carbon pricing program is designed to be highly progressive as well, with at least 25 percent of revenues dedicated to programs that benefit disadvantaged communities.
Critics warn that carbon pricing will not do enough to address the problems faced by the poor and middle class, but it is not realistic to expect climate policy to shoulder this burden. A carbon tax can be designed to cost-effectively reduce emissions while protecting households from energy price increases they cannot afford. That’s good public policy.
So let’s agree to put a progressive price on carbon, and then let’s discuss how to directly confront the serious problems facing the poor and middle class.
Noah Kaufman is a Ph.D. economist with the U.S. Climate Initiative of the World Resources Institute.