IMF's Stance on Carbon Taxes
The International Monetary Fund (IMF) has recently shared its "Chart of the Week", which offers insights into how carbon taxes can be more socially fair and economically efficient. The chart is based on a new research paper that suggests carbon taxes disproportionately impact lower-income groups. These groups spend less on products that benefit from exemptions than their wealthier counterparts.
Disproportionate Impact on Low-Income Households
The study found that low-income households pay between $1.26 USD and $4.95 USD more per tonne of CO2 than wealthier households. The average price paid for carbon across all emission sources in the EU in 2020 was around $11.35 USD, which was 60% lower than the EU ETS price of that year ($28.22 USD). This discrepancy is due to incomplete carbon price coverage in the value chains behind the products that EU consumers buy.
Global Carbon Tax as a Solution
The research paper suggests that the solution to this problem could be a global carbon tax. This would reduce carbon pricing regressivity on household expenditure in the EU. A global price would be most effective as it would raise carbon prices embodied in EU imports. This increases the scope for reducing the burden of carbon pricing on lower-income households through revenue redistribution.
Revenue Recycling and Progressive Taxation
The paper further suggests that when member nations have higher carbon taxes than their trading partners, a kind of "surplus" revenue accrues. This can be redistributed to lower-income households and in most cases, exceed the amount paid in carbon taxes. In open economies such as those of EU countries, the total carbon costs paid by households are not equal to the carbon costs that accumulate in domestic sectors. As a result, most households will get back more than they pay in carbon taxes.
The Big Lie of Carbon Tax Rebates
In Canada, the notion of carbon tax rebates has been controversial. The ruling Liberal/NDP coalition has been attacking any notion of "axing the tax" as something that would make Canadians poorer. However, multiple studies have found that most Canadian households lost money, even after the rebates.
Bottom Line
The idea of a uniformly applied global carbon tax giving net rebates to all but the very wealthiest households is an interesting one. However, it seems to be more of a wealth redistribution scheme than a solution to environmental problems. While it may work in theory, in reality, it could continue to hit low-income families the hardest. What are your thoughts on this matter? Share this article with your friends and let's have a discussion. Don't forget to sign up for the Daily Briefing which is everyday at 6pm.
