Does the Indexing of Government Transfers Make Carbon Pricing Progressive? American Journal of Agricultural Economics: 94(2

Whether in the form of a carbon tax or cap-and-trade permit system, climate policy is likely to raise the price of all energy-intensive goods such as electricity, heating fuel, and gasoline. The fraction of income used on these goods falls with income, measured either by annual income or by total annual expen-diture (as a proxy for permanent income). Thus, climate policy is found to be regres-sive on the “uses side ” (e.g. Burtraw, Sweeney, and Walls 2009, and Hasset et al. 2009). For these reasons, the economics literature and actual legislation have focused on whether per-mit revenue can be used to offset regressive burdens. In contrast, Rausch et al. (2010) use a com-putable general equilibrium model of the U.S. to find that carbon pricing is modestly pro-gressive, even ignoring the use of the proceeds from a carbon tax or auctioned permits. One factor driving this surprising result is the pro-gressivity of impacts on the “sources side”. Carbon pricing drives down returns to capi-tal and to resource owners (both relative to the wage). Those returns are a large share of income sources for high income households.