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CLIMATE ACTION PROGRAMME

9 April 2018

Carbon tax is a win-win for climate and low-income households

Researchers from the Massachusetts Institute of Technology (MIT) and National Renewable Energy Laboratory have found significant co-benefits to setting a carbon tax in the United States.

The study, recently published in the journal Climate Change Economics, used eleven research teams at different institutions, applying the same techniques and policies to model the impact of carbon taxes.

The starting values for the tax were $25 and $50 per ton with rates of increase of 1 and 5 percent a year. While there were significant differences in detail, all teams agreed on the core conclusion that carbon taxes can greatly reduce emissions, air pollution and the attending costs to society.

What’s more, using a mechanism to recycle the tax back to the general public could also help low-income households and increase economic activity.

Under one such scenario, using revenues from a carbon tax could be used to decrease other tax rates, therefore reducing the economic burden and decreasing emissions at the same time, a so-called “double dividend”.

The paper’s lead author, Justin Caron, said “By taxing carbon, we will collect a lot of money that can be used to supplant other taxes that we like less. Why tax something that we like?” Using less than 10 percent of this revenue can then be used to compensate lower-income households.

John Reilly, a senior lecturer at MIT’s Sloan School of Management, and who contributed to the study, said the idea was “sort of an obvious solution”.

“To take some chunk of the money and use it to focus on the poorest households, and use the rest to cut taxes. It doesn’t seem like a hard thing”.

Some experts believe that a carbon tax is essential if the world is to stand any change of meeting the ambitious goals of the 2015 Paris Agreement. The researchers concluded that such a tax would be effective in meeting these commitments, especially for the US, despite its plans to withdraw from the accord.

Reilly went on to say that “all these tax scenarios at worst meet US commitments for 2030, and the $50 tax is well exceeding it.” 

 

Photo Credit: Kolleen Gladden

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