The distributional effects of a carbon tax: the role of income inequality

The fact that a carbon tax is an environmentally and economically efficient instrument for reducing emissions is often highlighted, but the equity story is also of importance: who bears the burden of the tax? This paper addresses the question of the distributional burden of a carbon tax. The authors show that it is not only the income measure that matters for the incidence of the tax, but also the underlying distribution of income across a society. They look at the Swedish carbon tax on transport fuel and its impacts on different income groups over the period 1999–2012. The overall trend is towards an increase as time goes on in the burden borne by lower income groups – i.e. in regressivity – which is highly correlated with the increase in income inequality that has occurred in Sweden in recent years.