Energy Transition

What is carbon inequality, and how do we tackle it?

A view of the Feniglia beach in Porto Ercole, in Tuscany, January 23, 2010. The mystery surrounding the death of Baroque master Caravaggio may soon be resolved thanks to new DNA tests, as long as the right body can be found.  Pictures taken January 23, 2010.   REUTERS/Tony Gentile   (ITALY - Tags: SOCIETY) - RTR29H4X

A view of the Feniglia beach in Porto Ercole is shown. Image: REUTERS/Tony Gentile

Kavya Vaghul
Research Analyst, Washington Center for Equitable Growth
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Energy Transition

Today, the earth’s atmosphere holds more than 400 parts per million of carbon dioxide. That’s roughly 40 percent more than carbon dioxide levels at the start of the Industrial Revolution, and it’s primarily due to our unruly combustion of fossil fuels. Considering that carbon dioxide emissions increase greenhouse gas levels and consequently exacerbate climate change, environmentalists in the United States have long been proposing a Pigovian tax on the carbon contents of goods and services.

But how does any of this relate to equity? Let’s backtrack.

It begins with the fact that the rich are one of the biggest agents of climate change. In a study released in 2005, the U.S. Census Bureau found that high-income households (those earning more than $75,000 a year) consume double the energy of the poorest households (those earning less than $10,000 a year) in the United States. As a result, the rich significantly contribute to carbon dioxide emissions, too. A recent report from Oxfam concluded that people in the top tenth of the world’s income distribution are to blame for 50 percent of global emissions, while those in the bottom half of the distribution account for only 10 percent of emissions.

What makes carbon inequality worse is that minorities and low-income communities are disproportionately harmed by climate change’s pernicious effects. The White House’s National Climate Assessment report found that these vulnerable groups in the United States are disparately buffeted by the onset of heat waves, worsening air quality, and extreme weather events, which has ramifications for physical and mental health and financial well-being.

By nature, the causes and consequences of climate change have distributional components. And so does a tax-based solution—well, in part.

In principle, a carbon tax is a fee that is placed on the carbon contents of different types of fossil fuels based on the amount of carbon dioxide each type of fuel emits when it is used, factoring in the long-term social costs of emissions as well. Coal—in comparison to oil and natural gas, for example—emits the most carbon dioxide per unit of energy, so it would likely have the highest tax rate. There are also several questions about how the tax would be implemented and who should be taxed: Should the energy producers (upstream), distributors and retailers (midstream), or the consumers (downstream) be the point of taxation? Regardless of who in the chain pays, the tax is the most efficient way to discourage high-carbon consumption behavior to ultimately reduce emissions.

The problem, however, is that a carbon tax may also increase the price of products like gasoline, utilities, and even food, which is what makes it regressive. Statistics show that poor families generally spend a higher portion of their incomes on these basic necessities compared to middle-class and rich households. So, if the prices on products increase, poor families will be hit the hardest. In fact, a 2009 study by environmental economists Corbett Grainger of the University of Wisconsin and Charles Kolstad of Stanford University documents the distributional effects of a hypothetical $15-per-ton tax. They find that the burden of a carbon tax on households at the bottom fifth of the income distribution would be at least 1.4 times to 4 times higher than for households at the top fifth. What’s more, Grainger and Kolstad note that if a tax is also applied to other types of greenhouse gases, this disproportionate burden would only increase.

Of course, there are a couple ways to soften a carbon tax’s potential impact on low-income families. One extremely efficient idea is to recycle the revenues from a carbon tax to cut another tax. This “tax swap” could work by providing tax credits to reduce the regressive burden of corporate income tax (capital recycling) or payroll income tax (payroll recycling). The second idea is to redistribute the revenues from a carbon tax through lump-sum rebates. Economist Chad Stone at the Center on Budget and Policy Priorities argues that these rebates could theoretically reach low-income householdsthrough refundable tax credits, a supplement to direct federal payments to eligible groups, or the electronic benefit transfer (EBT) system.

It’s easy to imagine that Congress might disagree on how to make a carbon tax more progressive or what to do with the revenues, which could prolong passing new orexisting proposals. And, as it stands, carbon taxes might not fix resource inequalities at their root. The fact that low-income families spend a disproportionate amount of their income on carbon-rich essentials and don’t nearly contribute as much to emissions as the rich is still a signal that we must also think about other innovative ways to reduce energy costs for families while keeping carbon emissions down.

Given congressional gridlock, cities have been exploring ways to promote carbon equity. Improving the transit infrastructure and walkability of metro regions is certainly one option, especially because transportation and gasoline costs comprise the second-largest investment for low-income families and passenger cars account for more than 30 percent of transportation-related greenhouse gas emissions. In practice, these improvements could include planning strategies such as mixed-income transit-oriented development with mixed-use neighborhood design. Simply, this could help contain sprawl and reduce motor vehicle reliance, consequently reducing fuel consumption and carbon emissions for families across the income distribution.

Another community-based strategy is to adopt district energy systems. District energyis a highly efficient heating and cooling system that uses a central plant in typically a village- or neighborhood-sized part of a city to distribute energy to and from buildings within the district. Because the system is localized, it is able to balance energy demand between properties on the grid. Having a central plant also allows for integration of other renewable energy sources such as geothermal loops and solar cells. It is a significant investment upfront, but it boasts impressively lower carbon dioxide emissions than traditional systems while trimming home energy bills.

All this said, there are still several questions about the feasibility, costs, implementation timelines, and even carbon emissions abatement of these city-centric programs, especially in comparison to the efficiency of a carbon tax. That’s why, in the meantime, pursuing multiple, complementary solutions simultaneously can be the most effective approach to slowing climate change and dealing with its repercussions.

Whether we approach carbon use and emissions and climate change from the federal, state, or local levels, though, one thing is clear: Conversations about our environment, just like conversations about our economy, must include a vision to augment equity.

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