Discussion Paper: A Microsimulation Model of the Distributional Impacts of Climate Policies
When a new tax on greenhouse gas emissions is imposed, a new price is introduced through a cap-and-trade program, or prices are affected by the introduction of regulation, the economic welfare of households is affected through changes in product prices, tax obligations, and changes in income. The measure of the distribution of the changes in economic welfare on households is the incidence. Measures of incidence are always important to policymakers because of their implications for equity across income, geography, age, or other characteristics.
The policy we focus on in this paper is a tax on carbon emissions, but the methods and model we describe are applicable to other policies. Some taxes are designed, with varying levels of success, so that their incidence falls on those who gain from the use of the government revenue (e.g., gasoline taxes that pay for highway improvements), while others are designed to limit incidence on the poor (e.g., sales taxes that omit clothing and food). Pigouvian taxes on activities with a negative externality are often designed without the tax incidence in mind. For example, cigarette taxes have successfully reduced smoking, but their incidence has largely fallen on the poor
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