Impact of carbon pricing on households

Carbon pricing is widely accepted to be regressive in nature i.e. it would adversely impact lower income households more than higher income households. A uniformly applied carbon policy would mean that highest earning Canadians may pay four times more than low income Canadians; however they also earn six times more income indicating that they will be paying a smaller proportion of their income on cost increases relating to carbon pricing.1

The National Roundtable on the Environment and the Economy estimated the impact of a $27/tonne CO2 carbon price on households with different income levels in the absence of recycling of the revenue.

 

Burden of a $27/tonne of CO2 carbon price on households with different income levels in the absence of revenue recycling.

 

Note: Note that the figure assumes households make no abatement efforts. In reality, households will respond to the price signal to reduce their costs, and actual expenditures will be less than as illustrated in this figure.

Source: National Roundtable on the Environment and the Economy. Achieving 2050: A carbon pricing policy for Canada.1

 

Different populations within Canada will experience the effects of carbon pricing to different extents. Rural and Northern Canadians may experience an adverse effect – the average rural household may pay 20% higher in terms of the proportion of their income compared to those in major cities; however, the cost of living is lower in rural areas, potentially moderating the adverse effect.1

Effect of carbon tax on a typical two-income one-child family

For an average urban two-income earner family with one child and a combined income of $65,000, a carbon tax was estimated to result in $1,274 of additional expenditure. However, if accompanied by payroll tax reduction of $ 1,101, the total impact would be $172 or 0.3%. In comparison, average rural families may expect a 0.2-0.7% impact.2

 

Effect of a $30/tonne CO2e on prices

A $30/tonne of CO2e carbon tax will be equivalent to a unit tax of 7.4¢ per litre for gasoline, 8.5¢ per litre for diesel fuel, 6.8¢ per m3 for natural gas and $2.7 per gigajoule for coal.3 The largest increase in consumer prices would be for natural gas, followed by electricity and gasoline. Shelter, services, alcohol and tobacco, and clothing are projected to be relatively unaffected. As a per cent of total income and expenditure, households in the lower tiers will be affected more than the higher tier households. Net household incomes are projected to decrease notably for lower income households and be relatively unaffected for higher income households in the absence of revenue recycling to address these negative impacts.3

Per cent increase in consumer prices in response to a $30/tonne carbon tax, by commodity group

 

 

Source: Rivers, N. (2012). The distribution of costs of a carbon tax among Canadian households.3

 

The BC carbon tax of $10/tonne CO2e at inception was estimated to increase costs for low income quintile families by 0.7% and by 0.3% for highest income quintiles.4

 

However, these disproportionate effects can be completely overcome for most affected households with a revenue-neutral carbon tax (with dividends or income tax reductions). For example, the carbon tax in British Columbia was accompanied by a Low-Income Climate Action Tax Credit, which was evaluated to be moderately progressive in that the bottom 20% of BC households, by income, benefitted with a small net gain.5 This could be further improved by distributing all or most of the revenue from a carbon tax or auctioning permits in the case of cap and trade. Studies specific to the US scenario suggest such a policy would result in a positive 6.5% net impact in the lowest per capita income decile, and decreasing gradually with increasing per capita decile groups.6 The impact of a $25/tonne of CO2 carbon tax was estimated to be $135 per person in the lowest income decile and $618 in the highest income decile. With equal per capita dividends of $386 as a result of distributing 80% of the revenue, the bottom seven deciles will have a net positive gain ranging from $251 to $49. Overall, the net positive impact would be a median of $103.6 Such a carbon policy would essentially reverse the regressive impacts the policy.

 

Cost per capita of a $25/tonne CO2 with equal per capita dividends (US scenario)

 

Note: $25/tonne of CO2e carbon tax is combined with distribution of 80% of revenue collected via equal per capita dividends

Source: Cap and dividend: A state-by-state analysis.6

 

 

In another study, when a revenue-neutral carbon price of $55/tonne of CO2 is combined with revenue recycling, a negative net effect for bottom six income deciles is reversed into a positive net benefit. And, for two of the remaining four income deciles, the policy decreases the negative net benefit.7 However, it should be noted that some economists challenge the regressive impacts of a carbon tax.8 Of the seven studies reviewed by the Intergovernmental Panel on Climate Change (IPCC) in 1996, four concluded that the impact would be regressive, while the others suggested a proportional or progressive impact.9

A recent study by Regional Economic Modeling, Inc. (REMI) explored the potential impact of a modest $10/tonne CO2e revenue-neutral carbon fee which would increase by $10/tonne CO2e each year.  It suggested that the personal real disposable income of households would increase with the fee policy. It would increase every year reaching nearly $800 per capita by 2035.10

Increase in per capita real disposable personal income with Carbon Fee & Dividend policy (US scenario)

Source: The Economic, Climate, Fiscal, Power and Demographic Impact of a National Fee-and-Dividend Carbon Tax10

 

References:

1.      Achieving 2050: A carbon pricing policy for Canada. (National Round Table on the Environment and the Economy). at http://neia.org/wp-content/uploads/2013/04/carbon-pricing-advisory-note-eng.pdf

2.      Green Party of Canada. Carbon tax shifting. How will a carbon tax affect Canadian families? (Green Party of Canada, 2008). at http://www.greenparty.ca/policy/carbontaxplan

3.      Rivers, N. The distribution of costs of a carbon tax among Canadian households. Can Tax J 60, 899–915

4.      Sustainable Prosperity. Carbon pricing and fairness. (Sustainable Prosperity, 2011). at http://www.sustainableprosperity.ca/dl574&display

5.      Sustainable Prosperity. British Columbia Carbon Tax Review. (Sustainable Prosperity, 2012). at http://www.sustainableprosperity.ca/article3085

6.      Boyce, J. K. & Riddle, M. Cap and dividend: A state-by-state analysis. (Political Economy Research Institute, 2009). at http://www.e3network.org/papers/CAP_DIVIDEND_states.pdf

7.      Boyce, J. & Riddle, M. Cap and Dividend: How to Curb Global Warming While Protecting the Incomes Of American Families. PERI Work. Pap. (2007). at http://scholarworks.umass.edu/peri_workingpapers/108

8.      Baranzini, A. A future for carbon taxes. Ecol. Econ. 32, 395–412

9.      Climate Change 1995. Economic And Social Dimensions Climate Change Contribution Working Group III to the Second Assessment Report Intergovernmental Panel Climate Change. (IPCC, 1996). at http://www.cambridge.org/ca/academic/subjects/earth-and-environmental-sc...

10.    Nystrom, S. & Lucknow, P. The Economic, Climate, Fiscal, Power and Demographic Impact of a National Fee-and-Dividend Carbon Tax. (Regional Economic Models, Inc. (REMI) and Synapse Energy Economics, Inc, 2014). at http://citizensclimatelobby.org/wp-content/uploads/2014/06/REMI-carbon-t...