The Distributional Effects of a Carbon Tax: The Role of Income Inequality

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Abstract
This paper addresses the question of the distributional burden of a carbon tax. It shows that, not only the income measure -- annual or lifetime -- matters for the incidence of the tax, but also the underlying distribution of income. The Swedish carbon tax on transport fuel is regressive between 1999-2012 when measured against annual income, but progressive when using lifetime income. The overall trend, however, is toward an increase in regressivity, which is highly correlated with a rise in income inequality. Analysis of the determinants of distributional effects lends support to our hypothesis that, for necessities -- goods with an income elasticity below one -- rising income inequality increases the regressivity of a consumption tax. To mitigate climate change, a carbon tax should be applied to goods that typically are necessities: transport fuel, food, heating, and electricity. Carbon taxation will thus likely be regressive in high-income countries, the more so the more unequal the distribution of income.

Authors: Julius J. Andersson, Giles Atkinson

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Short introduction:
Julius Andersson conducts research in environmental and public economics, studying the effects of climate change mitigation policies in practice. He holds a PhD from LSE and is currently a postdoctoral researcher at the Stockholm School of Economics, and affiliated researcher at the Department of Geography and Environment at LSE.