Designing carbon taxation that does not unduly impact low-income households

There are strong policy arguments for removing environmentally damaging (perverse) subsidies and for introducing carbon taxation to help reduce carbon emissions. The difficulty from the perspective of social justice is that green taxes are unlike income tax; they do not directly relate to the ability to pay.

This project for the Joseph Rowntree Foundation, co-ordinated by PSI’s Simon Dresner, has examined if it would be possible to design a revenue-neutral carbon tax on household energy use and transport, with safeguards that would 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.

For more details of the research project, visit the project page.

Read a four-page briefing summarising the findings [pdf].

Read the full report [pdf].

Read the appendices to the report[pdf].