Carbon Taxes Can Help to Decrease the Carbon Footprint

Climate change and the harmful effects on the environment because of carbon dioxide emissions are some of the greatest problems facing the world. One proposed solution to combat climate change is a carbon tax. A carbon tax is an economic tool to reduce carbon dioxide emissions and reduce human-induced climate change. Carbon taxes increase the price of products that emit significant amounts of carbon dioxide. This paper will estimate the regressive impacts of a carbon tax on different income levels across the United States.

To do so, this paper breaks down the incomes in the United States into five quintiles and looks at how much each income quintile spends on home heating, gas, and electricity. Then it is calculated how much the price of home heating, gas, and electricity will increase when a carbon tax is implemented.

This paper will estimate the price increase for each income group as a percentage of the total income. It is hypothesized that the finding will show lower income groups pay more to a carbon tax as a percentage of their income than higher income groups. The carbon tax is a regressive tax in that it negatively affects lower-income people. This paper looks to estimate how much lower-income people are affected by a carbon tax to analyze the regressive impacts. In addition, this paper will discuss possible solutions to the regressive nature of a carbon tax. These proposed solutions include different revenue recycling schemes, tax cuts, and welfare payments. While comparing each solution, this paper will consider how effective each one is at mitigating the regressive effects of a carbon tax while still being effective at reducing carbon emissions.

Main Body

Over the past few decades, environmental degradation and the changing climate have taken a toll on plants, animals, and humans around the world. A marketplace solution is a favorable option to lower carbon emissions. A carbon tax is the most popular of these marketplace solutions. Carbon taxes have been shown to be effective at reducing carbon consumption and can help to decrease the carbon footprint. A few countries around the world have already implemented this tax. One country that has already implemented a carbon tax is Denmark.

The article titled “Are CO2 Taxes Regressive? Evidence from the Danish Experience” looked at many years of data from Denmark after they implemented a carbon tax in 1993 to see if it was a regressive tax. The article, written by Mette Wier, used national consumer survey statistics, input/output tables, and empirical data from current tax payments to analyze the distributional effects of the tax. Using this data, the author estimated how much each income group spent on electricity, home heating, and gas. This study found that carbon taxes are regressive and affect lower-income household disproportionally more than it does higher-income households.

Another country that is considering implementing a carbon tax in Ireland. Ireland, in hopes of decreasing their carbon emissions, proposed a £20 tax per ton of carbon dioxide. The article, titled “The Distributional Implications of a Carbon Tax in Ireland,” studied the carbon tax and how it would affect people across income groups. The authors of this article also looked at different revenue recycling schemes that could be implemented in addition to the carbon tax. This article looked at the direct effects of the carbon tax using micro-data on home heating, electricity, and motor fuel costs. The article broke up different incomes into deciles and used their spending habits to estimate how much carbon-emitting products each income group consumed. The findings were that the proposed carbon tax would cost the poorest households around £3 per week and the richest households around £4 per week. From this information, the authors concluded that a carbon tax is regressive because it disproportionally affects poor people more than it does rich people as a percentage of their income.

In the article “Who Pays a Price on Carbon,” the authors looked at how a tax on carbon would be distributed to consumers among different income groups in America. They used data on consumption patterns and emissions factors to see how the burden of a CO2 tax would be felt across income levels. The findings showed that the burden of the carbon tax would be much higher, as a percent of yearly income, on lower-income households than it would be on higher-income households. The article explained that there are consumption differences across income groups, which drives the regressive nature of a carbon tax. While the richest households would be paying more in absolute terms, the poorest households have a higher “burden-to-income” ratio. The study’s main conclusion was that a carbon tax would disproportionately affect people with lower incomes more because of the higher “burden-to-income” ratio.

Similar to the articles on Denmark and Ireland, as well as the article on the United States, this proposal will be to study the effects of a carbon tax on different income levels in America. Data from the U.S. Energy Informational Administration will be used to calculate the price increases of gas, home heating, and electricity when a carbon tax is implemented. This data from the U.S. Energy Informational Administration includes current average prices of home heating, gas, and electricity, as well as estimates on how much the price would increase when a carbon tax is passed onto consumers. These findings will be compared to other studies that have done these calculations, including a study done by the American Resources for the Future Institute.

Next, data from the U.S. Department of Labor- Bureau of Labor Statistics Consumer Expenditure Survey will be used to find how much each income quintile spends on home heating, gas, and electricity. Using this data, a functional formula can be created that describes the utility of a given family in each of the income groups. This utility function can relate to income and the amount of money spent on goods. When keeping the price of other goods and the incomes constant and increasing the price of carbon-emitting products (gas, home heating, and electricity), the utility will change.

This change in utility can be compared across income groups. By comparing the utility loss from a carbon tax for a high-income family with that of a low-income family, the regressive impact of a carbon tax can be shown. In addition, the amount spent on a carbon tax will be compared to the incomes in each quintile to show the percent of income each group spends on a carbon tax. The Bureau of Labor Statistics will be used as the primary data source. Information on total average annual expenditures by income quintiles and average annual expenditures of home heating, gasoline, and electricity are found in the Consumer Expenditure Survey.

Along with an analysis of the data, a policy analysis and a case study will be included in the paper. An analysis of different public policies that could be implemented to decrease the regressive impacts of a carbon tax will be done. Three proposed policies are revenue recycling schemes, tax cuts, and welfare payments. After studying each policy and the effects that each one has had in the past for different regressive taxes, an estimate on which policy would have the greatest impact in decreasing the regressive effects of the carbon tax will be made. In addition, a case study on the regressive impacts of a carbon tax in Demark and in Canada will be included in the paper. Both places have a carbon tax as well as policies to decrease the regressive effects of the tax. A comparison of Denmark and Canada will be useful to help in analyzing the impact of a carbon tax in the United States.

A carbon tax is one of the most widely discussed marketplace solutions to carbon emissions and climate change. Climate change is one of the most serious issues in the world. There have been noticeable changes to our planet that are caused by human activity and human-related carbon emissions. In the fight against climate change, economics proposed a carbon tax. This is shown to reduce the consumption of carbon-emitting products and decrease the carbon footprint. However, opponents of the carbon tax argue that it is regressive in nature and affect lower-income people more than higher-income people.

This has dissuaded some people from supporting a carbon tax. However, this paper will examine the regressive impacts of a carbon tax and will also explore some ways to combat the regressive effects of the tax. This work matters a great deal because climate change is a very important issue, and a carbon tax is widely accepted as an effective tool to combat carbon emissions. However, the burden of fighting climate change should not be put disproportionately more on lower-income people. Implementing a carbon tax as well as a policy to fight the regressive effects of the carbon tax could be a major way for the United States to do its part in combating climate change.

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