A Distributional Analysis of a Carbon Tax and Dividend in the United States (Fremstad & Paul)
Although the vast majority of economists view a carbon tax as an efficient mechanism to reduce greenhouse gas emissions, the policy does not enjoy widespread public support. One reason for this is that economists have failed to adequately address the policy’s effect on household budgets. This paper models the distributional impacts of placing a US$49 tax per ton on carbon in the United States. It finds that a carbon tax would disproportionately burden low-income households, even if the tax revenue is used to lower taxes on labor. By contrast, using the tax revenue for equal per capita dividends would protect the purchasing power of the majority of consumers and especially those in the bottom half of the income distribution. Hence, the authors argue that providing all Americans with equal rebates is the most fair and politically-feasible carbon taxation policy. The paper is available to download on the website of the Political Economy Research Institute (PERI).