The benefits of carbon pricing extend beyond just reducing emissions. It can also positively impact poor households and farmers. Economists have long believed that a price on emissions is an effective policy instrument that must be scaled up to include more commodities and more countries. About 70% of global emissions have yet to be covered by a price on emissions. One reason for the slow pace of putting a price on emissions has been concerns about how it will impact people.
A country can price emissions primarily through a carbon tax or by establishing an emissions trading scheme. A carbon tax is one where the government taxes emissions, and entities covered by the tax must pay the tax. Under an emissions trading scheme, firms acquire allowances for their emissions or the carbon content in their supply chains, with the government controlling the allowances and the market trading them.
Although these pricing strategies may seem burdensome, recent evidence from two studies shows they can positively impact the economy —low-income households and farmers.
How Does A Carbon Price Benefit Poor Households?
Carbon prices have so far been implemented in a non-uniform or heterogeneous manner, which means that certain commodities and regions are exempt from these prices. The rationale behind this heterogeneity is to avoid such a policy’s uneven incidence on households at different income levels. That means that policymakers intentionally remove certain types of goods or sectors of the economy from the tax to ensure it does not impact them disproportionately.
Despite good intentions, the way emissions are currently priced in the European Union has helped the rich more than the poor, which economists call a regressive tax, according to new research by the International Monetary Fund. Under the existing structure, poor households in France and Germany pay as much as $2 more per ton of emitted carbon dioxide. A carbon price can disproportionately impact poor households when applied to only some commodities. For instance, if a tax is applied only to fuel used for heating, it can be regressive because poor households spend more of their income on carbon-intensive goods like fuel heating. In contrast, higher-income households allocate less of their budget to such items. The research further shows that excluding items that wealthier people consume, like imported goods and air travel, makes the tax regressive.
To prevent the carbon price from disproportionately impacting the poor, the authors recommend making the carbon price uniform, which can equalize the burden evenly across households. The authors tested this by applying a single carbon price to all sectors and regions in the European Union. The findings show that in Bulgaria, Cyprus, and Malta, the impact of the tax – the difference between the incomes of rich and poor under a scenario of a uniform carbon price – is reduced by between 34% and 62%, indicating that poorer households would be much better off with a uniform price.
How Do Farmers Benefit From A Price On Emissions?
A tax on emissions can improve farmers’ income, according to a new study published in Nature Food last month, if the tax is funneled back into the economy to farmers for generating carbon sinks on their agricultural land. Based on calculations by the authors, farmers could earn as much as 235 billion if they receive financial incentives for every additional ton of carbon dioxide stored in their soils at the rate of a projected greenhouse gas price of $160 per ton of CO2 equivalent in 2050.
Storing more carbon in the soil would require incorporating techniques like planting cover crops, using biochar (charcoal made from organic waste), or practicing agroforestry (planting trees alongside crops or pastures) can help turn agricultural land into a carbon sink. The carbon reduction from such practices is comparable to efforts such as planting new forests, according to the above study.
A price on emissions can be an effective policy lever to reduce emissions, but the perception that it will have adverse welfare implications has made such a tax rather unpopular. However, evidence from recent research offers new insights into how a price on emissions can help reduce emissions without compromising people’s welfare and income. With such new findings, national governments and policymakers can expand the scope of existing pricing structures on emissions to make them more equitable and just.
