Carbon Taxation and Economic Equity Analysis

Carbon taxation is a market-based instrument designed to price greenhouse gas emissions in order to internalise their societal costs. The core challenge lies in balancing environmental effectiveness with fair distribution of economic burdens and benefits. Analyses combine economy-wide modelling with household-level assessments to capture both aggregate impacts and nuanced equity outcomes. Key considerations include the regressive nature of energy price increases, the design of revenue recycling mechanisms to offset disproportionate burdens on low-income groups, and the interaction between domestic policy and international finance in addressing global poverty. Effective policy design requires calibrating tax rates, exemption schedules, and transfer schemes to ensure that climate goals are met without exacerbating inequality or undermining public support.

Research from Nature Portfolio

Recent studies have shown that climate policies aligned with a 1.5 °C mitigation pathway can have divergent impacts on poverty depending on revenue use. Projections indicate that, absent redistribution, carbon pricing alone would drive tens of millions into extreme poverty by 2030. However, equal-per-capita redistribution of national carbon revenues offsets this burden and yields a small net reduction in global poverty. Further augmentation with international climate finance amplifies poverty alleviation, particularly in Sub-Saharan Africa. This work underscores that coupling ambitious emission reductions with both domestic dividends and coordinated global transfers can simultaneously advance decarbonisation and poverty eradication objectives.

Carbon Taxation and Economic Equity Analysis publication trend

The graph below shows the total number of articles in carbon taxation and economic equity analysis across all publications each year (not limited to Nature Index journals).

Technical terms

Carbon tax: A levy on carbon dioxide emissions designed to reflect the social cost of carbon and encourage low-carbon behaviour.

Revenue recycling: The redistribution of carbon tax receipts to households or public programmes to mitigate adverse economic effects.

Progressive distribution: A pattern in which fiscal benefits accrue proportionally more to lower-income groups than to higher-income groups.

Computable general equilibrium (CGE) model: A quantitative simulation framework capturing intersectoral and household responses to policy changes.

References

1. Combining ambitious climate policies with efforts to eradicate poverty. Nature Communications (2021).
2. Carbon taxation: A review of the empirical literature. Journal of Economic Surveys (2022).
3. Mitigating poverty: The patterns of multiple carbon tax and recycling regimes for Peru. Energy Policy (2021).
4. Climate policy design, competitiveness and income distribution: A macro-micro assessment for 11 EU countries. Energy Economics (2021).