Carbon Taxes and Inequality

This paper assesses the distributional impacts of carbon taxes on households by considering both the demand and the supply channels, through which an environmental policy might have an incidence on inequality. Using equivalent income as households' welfare metric and concentration indices as decomposition methods of showing inequality by components, our simulation results suggest that income losses through factor prices concentrate towards rich people as carbon prices increase, implying that the incidence of pollution tax on the source-side of income is progressive. Conversely, the incidence of pollution tax on the use-side (i.e., through commodity price changes) of income is regressive. However, due to the stronger incidence from factor prices, the combined e®ects of factor and commodity prices tend to reduce inequality following an increase in a carbon tax.