Distributional effects of climate change taxation: The case of the UK

Abstract

Current economic instruments aimed at climate change mitigation focus mainly on CO<inf>2</inf> emissions, but efficient climate mitigation needs to focus on other greenhouse gases as well as CO<inf>2</inf>. This study investigates the distributional effects of climate change taxes on households belonging to different income and lifestyle groups; and it compares the effects of a CO<inf>2</inf> tax with a multiple GHG tax in the UK in terms of cost efficiency and distributional effects. Results show that a multi GHG tax is more efficient than a CO<inf>2</inf> tax due to lower marginal abatement costs, and that both taxes are regressive, with lower income households paying a relatively larger share of their income for the taxes than higher income households. A shift from a CO<inf>2</inf> tax to a GHG tax will reduce and shift the tax burden between consumption categories such as from energy-intensive products to food products. Consumers have different abilities to respond to the tax and change their behavior due to their own socio-economic attributes as well as the physical environment such as the age of the housing stock, location, and the availability of infrastructure. The housing-related carbon emissions are the largest component of the CO<inf>2</inf> tax payments for low income groups and arguments could be made for compensation of income losses and reduction of fuel poverty through further government intervention. © 2010 American Chemical Society.