The distributional impacts of a carbon tax: balancing sustainability and justice Joshua Farley Community Development and Applied Economics Gund Institute for Ecological Economics University of Vermont

Outline of Talk Supply and demand for carbon emissions Supply and demand for carbon emissions Price rationing of essential resources: market efficiency and inequality Price rationing of essential resources: market efficiency and inequality CO2 emissions by sector and income: likely distributional impacts CO2 emissions by sector and income: likely distributional impacts How should revenue be spent? How should revenue be spent? Dividends Dividends Vermonter poll Vermonter poll Other options Other options

Supply Curve Must sum together all costs: labor, capital, biodiversity loss, climate change, etc. (marginal cost) CO2 emissions levels under discussion (16-41%) Safe level (80% reduction)

Demand Curve Energy essential to all economic production Energy essential to all economic production Agriculture alone emits more GHGs than planet can absorb Agriculture alone emits more GHGs than planet can absorb Barrel of oil = ~5000 hrs. human labor Barrel of oil = ~5000 hrs. human labor National push your car to work day National push your car to work day Highly inelastic demand Highly inelastic demand Large change in price has small impact on quantity Large change in price has small impact on quantity Small change in quantity has large impact on price Small change in quantity has large impact on price

Demand Curve for Essential Resources (e.g. food) Value: low and stable Trade-offs: relatively unimportant benefits Value: shift from marginal to total value (e.g. diamond-water paradox) Trade-offs: Life sustaining benefits Value: Increasing rapidly with decreasing quantity. Trade-offs: Resilience, increasingly important benefits physiological threshold: e.g. starvation Opportunity cost Economic output (fossil fuel economy)

Market Efficiency, Unequal World Is price rationing efficient for essential resources? Do we want to use the same logic for access to energy? Economic output (fossil fuel economy)

Market Supply and Demand Market supply ignores ecological costs Market demand = preferences weighted by purchasing power Economic theshold Price Energy use/CO2 emissions Price + tax cap Ecological theshold Price

Income inequality increasing fastest in New England

…and (almost) fastest in Vermont

Where do GHGs come from?

Car Fuel Expenditures by Decile National Vermont Vermont after 7.27% reduction

“Many homes were constructed before high energy costs made many energy conservation practices and products cost effective.” 2010 VERMONT HOUSING NEEDS ASSESSMENT

Sales taxes very regressive

How Should Revenue be Spent? New Proposal: 90% returned directly to households, businesses, and institutions; 10% for energy efficiency New Proposal: 90% returned directly to households, businesses, and institutions; 10% for energy efficiency RGGI: 99% energy efficiency RGGI: 99% energy efficiency

Impacts of dividend New study uses national data; Vermont atypical, especially for transportation New study uses national data; Vermont atypical, especially for transportation Overestimates progressivity Overestimates progressivity Would be very progressive at national level Would be very progressive at national level

Other Options Non-price rationing Non-price rationing WWII WWII Brazil vs. California Brazil vs. California Vermont Common Assets Trust Vermont Common Assets Trust Progressive expenditures Progressive expenditures Europe Europe Energy efficiency offers triple impact: $1 invested yields $3-4 RGGI Inc., Investment of Proceeds from RGGI CO2 Allowances. Regional Greenhouse Gas Initiative. Online: Energy efficiency offers triple impact: $1 invested yields $3-4 RGGI Inc., Investment of Proceeds from RGGI CO2 Allowances. Regional Greenhouse Gas Initiative. Online:

Naucler, T., Enkvist, P.A., Pathways to a Low-Carbon Economy - Version 2 of the Global Greenhouse Gas Abatement Cost Curve. McKinsey & Company.