Does the Indexing of Government Transfers Make Carbon Pricing Progressive?

Abstract

Whether in the form of a carbon tax or cap-and-trade permit system, climate policy is likely to raise the price of all energy-intensive goods such as electricity, heating fuel, and gasoline. The fraction of income used on these goods falls with income, measured either by annual income or by total annual expenditure (as a proxy for permanent income). Thus, climate policy is found to be regressive on the “uses side” (e.g. Burtraw, Sweeney, and Walls 2009, and Hasset et al. 2009). For these reasons, the economics literature and actual legislation have focused on whether permit revenue can be used to offset regressive burdens.

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