The Welfare Implications of Carbon Taxes and Carbon Caps: A Look at U.S. Households

Climate change has emerged as a leading environmental concern in recent years. The two widely discussed and debated options for abatement of greenhouse gas (GHG) emissions are a cap-and-trade system, at the level of producers, and an emissions tax. More interesting is the question of capping (and trading) at the level of individual households. Regardless of policy pursued, a key concern in implementing such policies relates to equity: stakeholders wish to understand the distributional or effects, whereby poorer households may be disproportionally impacted. In this paper, household expenditure data from the U.S. Consumer Expenditure Survey are used to anticipate the economic impacts of energy taxes versus household-level emissions caps (with buy-out permitted, for those who exceed their budget) across different income classes and different types of expenditures, including those on transport. A translog utility model was calibrated to estimate demand quantities under two different tax rates and four different cap-and-trade scenarios. While the 9-category demand system does not allow for likely consumption shifts (toward less energy-intensive items) within each demand category, the model still provided a series of meaningful results. For example, the $100-per-ton case was estimated to yield the same total carbon reductions (just over 12 percent) as a cap of 15 tons per person (per year). The majority of the emissions reductions under a cap-and-trade policy are estimated to come from higher income groups, while reductions are expected to be much more uniformly distributed under a tax policy. Welfare loss (in terms of equivalent variation) as a share of income is found to be higher for lower income households when carbon taxes are implemented. In the end, a cap-and-trade policy seems most effective in reducing emissions without negatively impacting lower-income households, and without worrying whether taxes will engender enough thoughtful consumption shifts to ensure steep reductions.


  • English

Media Info

  • Media Type: DVD
  • Features: Figures; References; Tables;
  • Pagination: 24p
  • Monograph Title: TRB 89th Annual Meeting Compendium of Papers DVD

Subject/Index Terms

Filing Info

  • Accession Number: 01155156
  • Record Type: Publication
  • Report/Paper Numbers: 10-2673
  • Files: TRIS, TRB
  • Created Date: Jan 25 2010 11:17AM