Designing carbon taxation to protect low income households

2013 report for JRF by Simon Dresner et al PSI and IFS 

There are strong policy arguments for removing environmentally damaging (perverse) subsidies and for introducing carbon taxation to help reduce carbon emissions. This project has examined if it would be possible to design a revenue-neutral carbon tax on household energy use and transport, with a focus on safeguards to protect low-income households from negative impacts.

  • The taxation of household energy is particularly controversial because expenditure on energy is highly regressive (low-income households spend a higher proportion of their income on energy than richer households) and because of concerns about fuel poverty.
  • Carbon pricing is widely recognised to be essential for the transition to a low-carbon society.
  • Household energy and air travel are taxed at lower levels than most other activities; effectively a subsidy that has the environmentally perverse effect of increasing emissions.
  • With appropriately-designed packages, a progressive approach to carbon taxation is possible with most low-income households gaining.
  • Universal Credit and Pension Credit are effective at delivering compensation to low-income households. Almost no households receiving them would lose money overall.
  • However, the compensation packages do not protect everyone on a low income as some are not eligible for benefits.
  • If the Government wants to use taxation to reduce CO2 emissions, it should not be dissuaded from doing so by fears of its impact on income, provided that at the same time it applies appropriate compensation measures.





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