As Congress’s August recess approaches, Senate Democrats’ timeline to negotiate a climate deal is extremely narrow. To date, their efforts have yielded little progress–although to their credit, many of the policies have been considered, even among Republicans. High oil prices, inflation, and other fiscal challenges have undoubtedly complicated an already challenging endeavor. If a climate deal is made, it likely will not be as adequate or durable as a carbon tax.
One of the most common critiques of a carbon tax is that it would have a regressive distributional impact. However, the United States’ continued reliance on a patchwork of climate regulations is concerning. In addition to the several advantages of a carbon tax over climate regulations, there is a significant disparity between the distributional analysis of carbon taxation and climate regulations. While many studies model the distributional effects of a carbon tax, the lack of distributional analysis of environmental regulations is jaw-dropping.
Opponents of a carbon tax typically use the transparent and detailed distributional analysis to criticize the policy without comparing it to alternative climate policies such as command-and-control regulations. Supporters of climate command-and-control regulations tend to avoid discussing their distributional effects or represent them as insignificant or positive. Their strategy is that if the public does not understand how climate regulations would impact various demographic groups, it would make regulations much more politically palatable than a carbon tax.
Economists, tax policy experts, and fiscal policy experts have presented the distributional effects of various carbon tax designs in detailed distributional tables. Using methods widely adopted to analyze distributional impact of other tax policies, analysts have conducted in-depth analyses on how a carbon tax (with or without revenue recycling) would impact taxpayers in various income brackets. The transparent and in-depth distributional analysis of a carbon tax is meant to facilitate constructive discussions on improving the policy design to mitigate the potential negative distributional outcomes. Unfortunately, they are often used to attack and criticize the policy unfairly.
On the other hand, much less distributional information is available for regulations. Harvard researchers reviewed a dozen major regulations (mostly environmental) issued from 2009-2011 and found that little information was provided on the distributional effects of these regulations. They concluded that federal agencies’ distributional analysis approach is “problematic” and “does not provide the data required if we wish to take distribution seriously.”
Climate regulations increase costs and compliance burden for companies, which would lead to increased product prices for consumers, with a disproportionate impact on low-income households. It is puzzling that proponents would represent the distributional effects of climate regulations as much more desirable than a carbon tax. After all, insufficient distributional information on climate regulations does not mean there has been a minimal or positive impact.
Policy analysts and lawmakers should see the detailed distributional analysis of a carbon tax as a desirable feature. They should also regard it as a great opportunity to improve the policy’s distributional outcomes with the carbon tax revenue. If anything, this is a significant advantage of a carbon tax compared to regulations. The distributional effects of climate regulations are largely unknown, leading to low-income families being disproportionately impacted without any recognition or policy remedies.
A carbon tax has significant advantages compared to regulations. It allows businesses the flexibility to decarbonize efficiently and quickly and raises substantial revenue. The abundant analysis of the distributional effects of a carbon tax would help inform lawmakers on how to use the revenue to mitigate its regressive distributional impact. As Democrats return to the negotiating table this month and next, it is imperative that they consider a carbon tax with the same sincerity with which they promised to address the climate crisis.
*This blog post is adapted from the analysis in the paper titled “Carbon Pricing and Regulations Compared – An Economic Explainer” authored by Shuting Pomerleau and Ed Dolan.