Carbon taxes: both fair and effective

09 April 2018 | updated 09 April 2018

Researchers at MIT and the National Renewable Energy Laboratory have found that carbon pricing can be an effective way to curb emissions of greenhouse gases.

Putting a price on carbon in the form of a fee or tax on the use of fossil fuels, coupled with returning the generated revenue to the public in one form or another, can be an effective way to curb emissions of greenhouse gases, according to researchers at MIT and the National Renewable Energy Laboratory (NREL).

What’s more, depending on the exact mechanism chosen, such a tax can also be fair and not hurt low-income households.

Different studies, same conclusion

The researchers were part of a multi-group effort using modelling tools to assess the impacts of various proposed carbon-pricing schemes. Eleven research teams carried out research. While significant details differed, all the studies agreed that carbon taxes can be effective and, if properly designed, need not be regressive, according to an MIT statement.

MIT’s John Reilly says the groups looked at several options for a carbon tax and use of the resulting revenue. They considered two different starting values per tonne of carbon emissions produced and two different rates of increase, as well as three different approaches to dispensing the revenue: an equal rebate to every household, a tax break for individuals, or a corporate tax break.

Lower rates could still meet Paris targets

Not surprisingly, the team found that the highest starting value and the highest rate of increase produced the greatest emissions reductions. But the study showed that even the lowest taxation rates could in themselves lead to reductions sufficient to meet the U.S. near-term commitment under the 2015 Paris Agreement on climate change, Reilly says.

And yet the most efficient way of achieving reductions in terms of overall impact on the economy is to use the revenue to reduce taxes on capital – corporate profits or investment income, according to the study. However, this option is also the most regressive as its impact falls disproportionally on lower-income households.

At the other extreme, the option of sending equal payments to everyone was found to be the least efficient for the overall economy, but also the least regressive. Individual tax breaks came in somewhere in between on both criteria.

Tax breaks plus rebates best solution

The researchers say another scenario – combining the basic strategy of providing tax breaks to corporations but adding a rebate to the low-income families most affected by the tax – could virtually eliminate the regressive aspects of the tax at very little cost in overall efficiency. This might also make it the most appealing option: it could appeal to conservatives concerned about the costs of such a program, as well as liberals concerned about its possible impacts on those at the lower end of the economic spectrum.

“It’s sort of an obvious solution,” Reilly says, “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.” 

Tax what you don’t like

Justin Caron, the paper’s lead author, says that all eleven research teams largely found similar results, though there were differences in the details. “Qualitatively, we all agree on many of the main conclusions.” That includes the fact that carbon taxes can indeed be an effective way to curb emissions.

“By taxing carbon,” Caron says, “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?” And, he adds, by using just a small portion of that revenue — less than 10 per cent — it’s possible “to compensate the lower-income people and neutralize the regressivity.”