Recycling carbon taxes in a progressive way can yield net benefits for the poorest citizens, a new study shows, in contrast with the business-as-usual belief that climate progress comes at the cost of increasing poverty.
“We find that if all countries adopt the necessary uniform global carbon tax and then return the revenues to their citizens on an equal per capita basis, it will be possible to meet a 2°C target while also increasing well-being, reducing inequality, and alleviating poverty,” writes a research team led by Mark Budolfson of Rutgers University, in the journal Nature Climate Change.
Climate policy research generally assumes that a carbon tax will subtract from all income groups equally. Because people with lower incomes will have a harder time paying a tax, and because “in rich countries fossil fuels are disproportionately consumed by poorer citizens,” carbon taxes are expected to have a greater impact on low-income residents, the authors state.
But “existing estimates of optimal climate policy have ignored the possibility that revenues from a carbon tax could be used in a progressive way that generates immediate net benefits for the current poor,” they add. “As a consequence, they mistakenly imply that climate action must come at some cost to overall well-being, and especially to the poor.”
The new study questions this assumption by reviewing economics literature and using a global climate policy model to compare how two different approaches will change inequality and consumption compared to business-as-usual.
The first approach had no revenue recycling component and showed the expected pattern. But in the second scenario, when the recycled tax revenues were distributed on an equal per capita basis, most citizens were net beneficiaries, the study found. The benefits of returning revenue to citizens could be even greater if total revenues are directed towards the poorest populations in the world, rather than the poorest within each country or region.
“Adopting strong climate policy need not entail a trade-off, where the people of today (and the poor in particular) must sacrifice for the benefit of future generations,” Budolfson told Rutgers Today.
As policy-makers debate whether to gradually ramp up aggressive action or make an immediate push toward maximum carbon reductions, the researchers said progressive revenue recycling leads to “high levels of decarbonization immediately.” The results of this study can inform regulators and lawmakers as countries explore using carbon taxes as part of their emissions reductions strategies, such as Canada’s carbon tax rebate.