Can a Carbon Tax Be Politically Feasible?

While a carbon tax may be efficient, it raises several equity concerns. A tax will raise the cost of using fossil fuels like coal, oil and natural gas. That implies that all the businesses that are using these fuels in production will now face much higher costs of production. As a result, the cost of most items that consumers buy will go up. These include not just items like electricity, gas or any type of home heating, but also the costs of everyday items like food, clothing, shoes, books—all of which are now being produced at a higher cost. The problem is that these costs are likely to impose much higher burdens on lower income households, because the money they spend on these items is a larger fraction of their household income than it is for higher income households. This regressive nature of a carbon tax is what causes the tax to be politically unpopular since no policymaker wants to cause any additional harm to those who are the most vulnerable in society. But there are ways to design a carbon tax that could be both politically appealing as well as improve social welfare. This panel will discuss ways in which what starts off as a regressive tax can be turned into something that is pro-poor and pro-work and that can be associated with good social outcomes.