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Policy
| 01/21/16

Making sure carbon pricing doesn’t hurt the poor

TCE

Putting a price on carbon is widely touted by researchers, policy wonks and environmental campaigners as the fastest, cheapest, most effective way to get the world to switch away from fossil fuels. But can such policies, whether via carbon taxes or carbon trading, actually end up exacerbating social problems?

Fresh research on the impact of carbon pricing on energy access in India in a brand new journal launched last week, Nature Energy, suggests that they can—if strong supports for low-income households are not put in place to counteract these effects.

The researchers, from Vienna’s International Institute for Applied Systems Analysis (IIASA), note that 3 billion people worldwide still burn traditional solid fuels such as firewood, charcoal, dung and crop waste to cook with and to heat their homes. Indoor air pollution from the incomplete combustion of solid fuels kills 4.3 million every year, with the largest concentration of such deaths—1.7 million—in South Asia. And a price on carbon would make the situation worse, according to economic models developed by the IIASA researchers.

The reason is that solid fuels are generally free while more efficiently burning liquid fuels such as propane or butane are more expensive, and a carbon price would make an already challenging switch even harder for households to make. The researchers modelled the effects of carbon prices of varying stringency, and found that a carbon price of US$30 a tonne would increase non-solid-fuel energy costs by 38 percent compared to today, forcing 21 percent more South Asians to keep using solid fuels than would without a carbon price.

As the carbon price increases, the greater the subsidies for liquid fuels and the purchase of clean-burning stoves required to counteract the problem. To optimally offset the barrier that a $30 carbon price creates, subsidies clocking in at $6.3 billion a year would be necessary.

Parallel questions are raised in the Global North: how can a socially just carbon pricing system be implemented so that it doesn’t hurt lower-income citizens? Higher prices for heating, transport and other carbon-intensive purchases can hit poorer households hard.

Alberta’s proposed carbon tax policy, which will be tabled as a bill in the provincial legislature later this year, suggests a pathway to how this can be achieved. It would ensure that some of the revenues collected are earmarked as rebates through various programmes to provide generous support to the 60 percent of people with Alberta’s lowest incomes. Conversely, as the centre-left Canadian Centre for Policy Alternatives (CCPA) think-tank notes, while in its early years BC’s carbon tax offered a low-income tax credit that accounted for a third of the tax’s revenues, by 2012, this figure had fallen to just 12 percent—a statistic that has not changed in the intervening years—while the proportion allotted to corporate tax cuts climbed from 32 to 67 percent of gathered revenues.

A simple way to fix this, the CCPA argues, would be to expand the low-income tax credits to cover the bottom half of all households (up to $60,000 in income) and ensure that they receive on average more in credits than they pay in carbon tax.

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