Carbon Pricing and Income Inequality: An Empirical Investigation
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Carbon pricing, a carbon tax or emission trading system, is widely considered one of the most powerful policy options for reducing greenhouse gas emissions. However, since a carbon pricing causes the costs of energy and other goods to increase, there are many concerns that carbon pricing would be regressive, negatively affecting low-income households and income inequality. While most of earlier studies use microsimulations and Input-Output tables to evaluate the distributional effect of different carbon pricing scenarios, debate continues over the impacts of carbon pricing policies on inequality in practice. This paper tries to estimate the effects of the carbon pricing policies on inequality with a panel of 53 countries from 1990 to 2019 using a panel fixed-effect model and panel VAR (Vector Autoregression) model. The estimation results indicate that carbon pricing has progressive effects on inequality and revenue-recycling mechanism has regressive effects. The same result is found for OECD (or high-income) countries whereas carbon pricing tends to be regressive for non-OECD (middle and low-income) countries.
Abstract
Carbon pricing, a carbon tax or emission trading system, is widely considered one of the most powerful policy options for reducing greenhouse gas emissions. However, since a carbon pricing causes the costs of energy and other goods to increase, there are many concerns that carbon pricing would be regressive, negatively affecting low-income households and income inequality. While most of earlier studies use microsimulations and Input-Output tables to evaluate the distributional effect of different carbon pricing scenarios, debate continues over the impacts of carbon pricing policies on inequality in practice. This paper tries to estimate the effects of the carbon pricing policies on inequality with a panel of 53 countries from 1990 to 2019 using a panel fixed-effect model and panel VAR (Vector Autoregression) model. The estimation results indicate that carbon pricing has progressive effects on inequality and revenue-recycling mechanism has regressive effects. The same result is found for OECD (or high-income) countries whereas carbon pricing tends to be regressive for non-OECD (middle and low-income) countries.
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