New Article: Carbon Taxes and Economic Inequality

Shi-Ling-Hsu, Carbon Taxes and Economic Inequality, Harv. L. & Pol’y Rev. (forthcoming 2021). Abstract below:

Carbon taxation and the advancement of economic justice do not seem to be particularly consonant goals. But in fact, carbon taxation is vital to preserving economic justice, because it is the most important tool for arresting, to the greatest extent possible, climate change. Climate change is the most brutal segregator of haves and have-nots, and unless a dramatic economic transformation takes place quickly, climate change could drive inequality to apocalyptic extremes. Moreover, a carbon tax can, and should, be designed so that the revenues are distributed on a per-household or per-person basis, which would have a modest redistributive effect, because such lump-sum payments would have the effect of overcompensating most poor households and undercompensating most rich households for the increased energy costs resulting from a carbon tax.

Despite almost universal approval from economists, carbon taxes remain politically challenging to enact, for three reasons. First, carbon taxes are viewed unfavorably because people superficially perceive carbon taxes as pure costs while paying only secondary attention (if any at all) to the revenue side, and the benefits that could be obtained using carbon tax revenues. Second, skepticism persists about the effectiveness of markets for changing behavior. And finally, concerns persist that carbon taxation is regressive, hurting poor households much more than rich ones.

This essay offers a response to these concerns. While many measures must be undertaken to address economic inequality and unequal vulnerability to climate change, the most important step to take would be to enact a carbon tax in which the revenues are returned directly to taxpaying households on a per-household or per-person basis, leading to a modestly redistributive outcome. The only way to cure misperceptions about carbon taxation may simply to institute one, and let the outcomes speak for themselves.