Designing carbon taxation to protect low-income households
April 2011 to September 2012
Research project leader(s) at PSI
Background, summary and aims
This project will examine how to design a carbon tax on the household use of energy and transport with safeguards to protect low-income households from disproportionate negative impacts.
Carbon pricing is widely recognised to be essential for the transition to a low-carbon society. The aim of the project is to examine possible ways to structure the detailed design of a carbon tax. A range of mechanisms will be explored, separately and together, to protect low-income households.
Policy and practice relevance
The research will build on previous research for JRF by Paul Ekins and Simon Dresner on removing regressivity from green taxes. That research informed and influenced political and policy debate about green taxes, concern about regressive effects and how to overcome them. The recent development of the DIMPSA model by CSE provides an opportunity to take this area of research further forward and to inform future policy debates about the design of green taxes.
Research design and methods
The research will utilise the UK distribution of emissions in DIMPSA to simulate the impacts of various designs for a carbon tax. It will also make use of recent research at the UCL Energy Institute (UCL-EI) and elsewhere that compares the theoretical energy requirements of households and their actual consumption. IFS’s TAXBEN model will be used to study the impacts of changes to taxes and benefits.
DIMPSA will be further developed to simulate the impacts of different designs for a carbon tax and compensatory mechanisms. Because the Coalition government has a pledge to raise the income tax allowance to £10,000 over the course of this Parliament, we will look at the distributional effect of recycling some or all of the revenue that way.
Increasing the income tax allowance would not help those on incomes below the tax threshold, so we will look at additional measures to help them. These will take six forms:
- Benefits/tax credits for those below the income-tax threshold.
- Exemptions from the carbon tax on household energy for those below the income-tax threshold.
- Energy-efficiency measures.
- Rebalancing winter fuel payments (WFP).
- Other progressive (non-green) tax changes.
- Concessions for rural areas.
Each of the above compensation mechanisms will be modelled and different ones will be combined together in different ways to try to find the combinations with the best distributional effects. We will also be analysing the administrative feasibility of the proposed compensation mechanisms in parallel with the modelling.