The distributional impacts of a carbon tax: balancing sustainability

and justice

Joshua FarleyCommunity Development and Applied Economics

Gund Institute for Ecological EconomicsUniversity of Vermont

Outline of Talk

Supply and demand for carbon emissions

Price rationing of essential resources: market efficiency and inequality

CO2 emissions by sector and income: likely distributional impacts

How should revenue be spent? Dividends Vermonter poll Other options

Supply Curve

Must sum together all costs: labor, capital, biodiversity loss, climate

change, etc.

(marginal cost)

CO2 emissions

levels

under

dis

cuss

ion

(16-

41%

)

Safe

level (8

0%

re

duct

ion)

Demand Curve Energy essential to all economic

production Agriculture alone emits more GHGs than

planet can absorb Barrel of oil = ~5000 hrs. human labor

National push your car to work day Highly inelastic demand

Large change in price has small impact on quantity

Small change in quantity has large impact on price

Demand Curve for Essential Resources(e.g. food)

Value: low and stable

Trade-offs: relatively unimportant benefits

Value: shift from marginal to total value (e.g. diamond-water paradox)

Trade-offs: Life sustaining benefits

Value: Increasing rapidly with decreasing quantity.

Trade-offs: Resilience, increasingly important benefits

phys

iolo

gic

al t

hres

hold

: e.

g. s

tarv

atio

n

Op

port

un

ity c

ost

Economic output (fossil fuel economy)

Market Efficiency, Unequal World

Is price rationing efficient for essential resources?Do we want to use the same logic for access to energy?

Economic output (fossil fuel economy)

Market Supply and Demand

Market supply ignoresecological costs

Market demand = preferences weighted by purchasing power

Eco

nom

ic t

hesh

old

P

rice

Energy use/CO2 emissions

Price + tax

cap

E

colo

gic

al

thesh

old

Price

Income inequality increasing fastest in New England

https://www.bostonfed.org/commdev/c&b/2007/fall/Gittell_Rudokas_New_%20England_income_gap.pdf

…and (almost) fastest in Vermont

Where do GHGs come from?

Car Fuel Expenditures by Decile

National Vermont Vermont after 7.27% reduction

“Many homes were constructed before high energy costs made many energy conservation practices and products cost effective.” 2010 VERMONT HOUSING NEEDS ASSESSMENT

Sales taxes very regressive

How Should Revenue be Spent? New Proposal: 90% returned directly to

households, businesses, and institutions; 10% for energy efficiency

RGGI: 99% energy efficiency

Impacts of dividend New study uses national data;

Vermont atypical, especially for transportation

Overestimates progressivity Would be very progressive at national

level

Other Options

Non-price rationing WWII Brazil vs. California

Vermont Common Assets Trust Progressive expenditures

Europe Energy efficiency offers triple impact:

$1 invested yields $3-4 RGGI Inc., 2011. Investment of Proceeds

from RGGI CO2 Allowances. Regional Greenhouse Gas Initiative. Online:

www.rggi.org/docs/Investment_of_RGGI_Allowance_Proceeds.pdf.

Naucler, T., Enkvist, P.A., 2009. Pathways to a Low-Carbon Economy - Version 2 of the Global Greenhouse Gas Abatement Cost Curve. McKinsey & Company.