Going forward, as we seek to reduce our greenhouse gas emissions to lower levels, it is likely that climate policies will be more comprehensive in Europe; domestic policies such as the Emissions Trading Scheme (ETS) will likely be widened to include more sectors. It is possible, if not likely, that climate policy measures will begin covering consumers’ emissions. While consumers may already be feeling higher prices as a consequence of the ETS, future policies could directly target their own individual purchases and activities that emit carbon.
When it comes to designing such policies, one concern for governments is how the cost increases associated with climate policy are distributed across different household groups. This is likely to include questions about whether or not such policies are ‘regressive’. A regressive policy is one that, relative to income, affects poor households more than rich ones.
Such would be the case of a uniform carbon tax across the economy. As the poor spend a higher share of their income on energy than rich households, a carbon tax would hit them harder (proportional to their income) than the rich. While regressive taxes already do exist in Norway and other countries (road tolls are a good example), measures can be designed to be ‘progressive’. Income tax, for instance, is generally designed to be a progressive tax: the higher one’s income, the larger a share of it will be paid to the government. There exist a number of possibilities for expanding market-based, but non-regressive, climate policy measures to the individual consumer. Two such possibilities have been featured in the international media in the last few months.
The first is the idea for a personal carbon credit scheme in the UK, initially presented last summer by the then Environment Secretary David Miliband. This was followed up by a feasibility report by the Centre for Sustainable Energy (CSE) – and coverage in the Guardian newspaper soon after. The idea behind the scheme is that each individual UK resident would be given a personal carbon “credit card” and free annual carbon allowance. The allowance for each person would be the same, and depend on the country-level greenhouse gas emissions quota for each year.
Under such a scheme, every time a purchase is made for goods such as food, gasoline, electricity and air travel, consumers will hand over money as well as their carbon credit card, from which the carbon associated with the item would be debited. A carbon exchange would also be created so that someone with a lean carbon budget could sell his unused credits to someone with a more carbon-rich lifestyle. Visitors to the UK would have to buy credits from the market to satisfy their carbon emissions. Because of the possible rewards from saving (and then selling) one’s own carbon credits, the scheme will get people to choose goods and activities with lower carbon.
The personal credit schemed avoids being regressive because it distributes allowances equally across consumers for free, regardless of income. Low income individuals are likely to fare better than those with high incomes, because they on average have much lower carbon emissions. As a result, they will likely have credits left over that they can sell – leaving them with extra money they can spend on other things. On the other hand, higher income, high carbon consumers will need to spend more to make sure they have enough carbon permits to cover their emissions. In the end, the richer you are, the harder this scheme will likely hit you.
A second, but similar, idea was proposed by Harvard professor N. Gregory Mankiw in the New York Times last month. Mankiw calls for a carbon tax to be universally applied in the United States, with the tax revenues being refunded uniformly back to the populace via lowered income taxes. For the US, he suggests a $15 tax per ton of carbon dioxide, which is refunded as a flat $3600 reduction in income taxes for each person. Visitors to the US would pay the tax, but not get any refund.
From the perspective of the consumer, this ‘bonus’ $3600 will be used to pay the extra costs incurred from the carbon tax. Yet like the personal carbon credit card, it rewards those who live a carbon-lean lifestyle: often those in low-income households. People with few carbon emissions may find they don’t need to use all of the tax refund to pay for their carbon emissions – leaving them with extra money to use on other goods. The rich, however, are more likely to find that the refund does not cover all their carbon expenses, meaning they must use money from their remaining funds to fill the gap. Just as with the carbon credit card scheme, this proposal is progressive; the richer you are, the larger a share of your income will likely be used to pay your carbon expenses.
The question of whether a carbon tax is preferred over a personal credit scheme is worthy of another discussion. Yet two additional important questions are raised by the schemes. How will the logistics of tracking millions of consumers’ carbon allowances in one system be organized, and how much will it cost? It will likely be a very large and unprecedented endeavor. In the case of the carbon tax, will citizens trust their government to refund all the carbon tax receipts? Transparency and information will not doubt be a key to the success of such a plan.
Future climate policy measures will no doubt be more comprehensive, and extend beyond the current ETS scheme. By directly targeting the consumer, policies can get to the heart of who is driving the economy, and ultimately, its energy use and carbon emissions. The above suggestions are of course two of many possibilities, but they offer the prospect of non-regressive policies that burden the rich more than the poor.
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