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Elisa Belfiori explores the relationship between household inequality and carbon taxes. Finding that low-income households have higher emissions per dollar spent, indicating that carbon taxes could disproportionately impact them.

Image courtesy of interviewee. October 2, 2024

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This video discusses the complexity of addressing climate change, shifting focus from the traditional perspective of pollution as an economic efficiency issue to emphasizing equity. The speaker highlights that climate change exacerbates inequalities, impacting different countries, households, and generations variably.

They argue for the need to develop climate policies, particularly carbon taxes, with an equity lens, meaning that the design should consider how different income households are affected by such policies. Low-income households typically have consumption patterns that are more carbon-intensive, primarily spending on essentials like food, energy, and transportation, making them more vulnerable to the impacts of carbon taxes.

The speaker points out that traditional approaches often assume a uniform tax applies equally to all, which can ignore the differentiated impacts on various socioeconomic groups. Instead, they advocate for a progressive carbon tax, where wealthier households pay a higher rate given their lower relative burden of the tax.

Further, they analyze how to formulate an optimal carbon tax within an unequal economic framework. The findings suggest that a well-designed carbon tax could be welfare-improving, benefitting both low- and high-income households alike. However, they caution that such policies are currently insufficient to meet climate targets set by the Paris Agreement, necessitating a more rigorous approach.

Lastly, they indicate areas for further research, including the vulnerabilities of low-income households to climate change impacts and the effects on their employment in high-emission industries. This video emphasizes the importance of addressing equity and distributional consequences in climate policy formulation.

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Here are five key points extracted from the video regarding climate change and equity in policy design:

1. **Focus on Equity Over Efficiency**: The speaker argues that while climate change has often been framed as an issue of efficiency (i.e., over-pollution), it is crucial to also consider the equity aspects. Inequities exist across countries, households, and generations, making climate change a problem that affects different groups unequally.

2. **Impact of Carbon Tax on Low-Income Households**: The analysis emphasizes that a uniform carbon tax will disproportionately affect low-income households, as they tend to have consumption patterns that are more carbon-intensive (e.g., spending more on essentials like food and energy). This suggests that policy design should account for these disparities.

3. **Need for Progressive Taxation**: The video advocates for a differentiated or progressive carbon tax that charges higher rates to wealthier households. This approach recognizes that low-income individuals derive relatively more value from each dollar spent and aims to mitigate the disproportionate burden on these households.

4. **Policy Implementation Challenges**: Despite the ideal of a progressive carbon tax, there are practical challenges in implementing such a policy. The conversation highlights the necessity of discussing what an equitable but uniform carbon tax could look like, considering real-world political and economic constraints.

5. **Limitations of Current Policies**: While the proposed policy design aims to improve overall welfare and can benefit all income levels, it acknowledges that current approaches may not lead to sufficient reductions in emissions to meet international climate goals (such as those outlined in the Paris Agreement). This indicates a need for stricter policies that cater to both equity and climate outcomes.

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Here are some key quotes from the video, summarizing the main ideas and arguments presented:

1. **On the Nature of Climate Change**:
- "I am convinced that it's more about the equity side of the problem. That is what makes climate change a problem... there are so many inequities around the problem."

2. **On Inequity Across Different Groups**:
- "It is true across countries... across households and across consumers… also across generations."

3. **On Policy Design and Equity**:
- "When you put a policy there is gonna be people who benefit more and people who benefit less, but also... people who are gonna be hurt more by the policy."

4. **On the Effects of Carbon Tax**:
- "The policy cost is not equal across the society... it's gonna be more, relatively more, on low income households compared to high income households."

5. **On the Importance of Consumption Patterns**:
- "Low income households have a consumption basket that is more intensive in carbon emissions... higher the size of income... those represent 20% of their consumption."

6. **On the Role of Economic Models**:
- "...for a long time... it was about thinking about what we call a representative consumer... let's think that we are all alike."

7. **On Heterogeneity in Climate Policy**:
- "As soon as you start thinking about unequal households, the first policy implication that you need an unequal policy."

8. **On Optimal Carbon Tax Design**:
- "It is no longer true that the same tax for everybody is optimal. You want to charge a different rate, and in particular a progressive rate."

9. **On the Impact of Policy on Welfare**:
- "In our case... if you design the policy well... it’s gonna be good for everybody. There are no winners or losers, everybody wins."

10. **On Climate Goals and Policy Limitations**:
- "Quantitatively these policies are not even close for the climate, for the Paris agreements... even though emissions are reduced with the policy, it's not that much less."

11. **On the Broader Impacts of Climate Policies**:
- "Low income households also work in highly polluting industries... they might lose their jobs... the distribution and impact of the policy even worse."

These quotes encapsulate the video's focus on the intersection of climate change, economic policy, and social equity, highlighting the importance of incorporating equity into climate-related economic policies.

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Usually we think about, climate change

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as maybe we are polluting too much.

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And in economics, that would be the question of,

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efficiency.

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Like, we are not doing the, the right thing.

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Um, and that is true,

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and for a long time I've been thinking about

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climate change in that way.

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But I think more

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and more as I have been doing research in,

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in climate policy is, I am convinced

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that it's more about the, equity side of the problem.

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That is what makes climate change a problem is it's not

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so much the fact that we are polluting,

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but the fact that there are so many,

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inequities around the problem.

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And this is true across countries when, you know,

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like the develop the developed countries versus

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developing countries.

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It is true across households and across consumers.

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Uh, it is true, true also across generations,

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like we are polluting now,

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and this is gonna cause a cost over future generations.

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And so that, that side of,

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the inequalities surrounding the problem is

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what makes climate change really a very

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difficult problem to solve.

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Uh, and I guess, the ultimate reason why,

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I am doing this research is, just trying

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to think about the problem in that way.

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When you talk about distribution, like when you, you,

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when you think about a policy in the economy, I mean,

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it could be like a policy

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and we, face the same policy all of us,

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and it, it makes, us equally good or equally bad.

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And that's not the case for climate change.

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When you put a policy there is, there is gonna be people

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who benefit more and people who benefit less,

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but also, especially people

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who are gonna be heard more by the policy.

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And, in the context

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of this paper is gonna be heard more,

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because of, carbon tax.

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Uh, and, and then the, the,

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you can think about the distribution of the cost.

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The policy cost is not equal across the society.

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Uh, and in particular, like in the context of this paper,

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it's gonna be the, the, the, the cost of the policy.

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It's gonna be more, relatively more,

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on low income households compared to high income households.

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Things about solving the climate problem,

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but with an eye on equity just to say, well, what,

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what is the best policy I can design?

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I mean, one thing would be to say, okay,

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let's just design the best policy that we can

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that solves the problem.

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And then I don't care if people are, are heard differently,

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this paper says, no, we want to fix the problem.

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That's the main, that's the first goal is to say, well,

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what's, what is a policy

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that is gonna address climate change

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and is gonna be able to solve it?

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Or at least we have a shot at solving the problem.

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Uh, but at the same time, I want to think about a policy

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that try, that has an eye on, on

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how different people

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Are hurt by, by the policy consequences.

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The literature for a long time was, focused on,

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because the problem is so big.

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I mean, you have so many, I mean, climate change, you know,

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it's, it, it is not an economic pro,

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it's an economics problem,

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or it's also a problem from science by,

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physics is a political problem.

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So it's, it crosses many, disciplines.

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Um, so for a long time, at least in economics,

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it was about thinking about,

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what we call a representative Asian economy, which is,

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let's think that we are all alike,

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like all the laser representative consumer in the

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representative world.

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And let's think about the policy in that context.

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Uh, and the main policy implication would be, well,

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we need a common carbon tax.

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So it's a carbon tax that is gonna be the same

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for everybody, for every country, for all generations.

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It is the same, no, maybe not for all generations.

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I take that back, he said, but yes, for every in, in,

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because the tax can change over time, right?

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But in a given period of time,

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it's gonna be the same for everybody.

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It doesn't matter if you are polluting in Argentina

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or if you are polluting in England.

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Um, so as we develop more and the, the techniques

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and, the challenges of thinking about this problem

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that is not totally, an economic problem

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because it has this science component, we need

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to think about the carbon cycle and things and the,

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and how the temperature increases and,

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and what are the economic impacts of a,

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a given temperature increase.

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Um, so in the last, I would say maybe 10 years, the,

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the literature is moving into thinking about,

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climate change with size of heterogeneity.

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So it can be that maybe countries are different,

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maybe people are different.

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Maybe people suffer differently depending on

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where they live.

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Um, and,

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and once you add the heterogeneity, then the, the,

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the design of the policy is more involved.

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Um, and I guess, one thing, like a first,

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body of literature was thinking about, okay,

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let's just put a carbon tax

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and think about the distributional impact.

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Who is gonna suffer? What is the cost

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for low income house force or for low income countries

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or having a carbon tax?

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Um, but now this paper, the contribution will say, will be

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to say, well, let's just not think about any arbitrary

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climate policy in an heterogeneous or qual economy.

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Let's try to think about the policy we want to design, given

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that we want to consider that economy is,

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has inequality, that is existing inequality.

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Uh, and so the optimal policy design, like trying

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to think out how do we design the best policy possible?

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That would be the, the, the contribution

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of this particular paper.

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The dimension that calls our attention was,

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this consumption data. And they

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Tell you, okay, what, how did I spend my money, right?

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And did I eat food or energy transportation?

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Like all the categories,

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consumption categories per households.

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Um, and then we combine that data.

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So we have that, that is, that tells us, okay, each dollar,

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where the family spend that money.

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And then we wanted to connect that with how that relates

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to carbon emissions.

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So that dollar that the person spent,

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how much carbon did it add to the atmosphere?

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So we had to combine the consumption data with emissions.

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The emissions data is not at the consumption level,

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it's at industry level.

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So we did, we had to do that mapping from consumption,

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adding those different consumption categories, connect

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that to an industry.

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And then the industry connected to the emissions.

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That data is coming from EPA is the environment pro,

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protection agency going from 670 something

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expenditure categories to about 400 industry

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codes, and then from there to carbon emissions.

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So what we are able to document with this data set is

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that if you, look at income deciles,

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and so if you organize people in terms of their income,

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what we document is that low income households have,

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consumption basket

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that is more intensive in carbon emissions.

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So if you look at the, and that is

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because of the composition of the basket.

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If you look at what, where,

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what are the consumption categories

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for low income household, these are gonna be, food,

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energy transportation, and maybe they just run out of money.

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Like they buy the those three.

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And that's all the, the, the, the, the budget.

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And those are three, three categories that are very high in,

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in carbon emissions.

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Uh, while if you look at the, higher the size of income,

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like the wealthier, families,

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they have those three categories,

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but maybe those represent 20% of their consumption.

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And then they have services

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and they have like more like a kind of luxury goods,

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which are less carbon intensive.

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And then they are not, they,

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they don't face like a carbon tax on those.

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Um, and so, yeah, if you look,

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the relationship you say, you can say there is a,

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a negative relationship between income

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and the carbon intensity intensity of consumption.

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Then we, we decided, okay, let's just write a paper on this.

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It's like a fact that is, sufficiently important

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and it's a first order problem for climate,

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for thinking about climate policy.

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And then we went into steps

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First we said, well, we need

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to think about optimal policy.

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So what is the best that we can do?

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We want to take into account the fact, the fact

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that low income households, if we put at carbon tax,

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are gonna be, are gonna, be, are gonna suffer more.

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Uh, and so we do the, the, the design,

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the policy design problem.

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And the first insight that we get there is that as soon

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as you start thinking about unequal households,

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the first policy implication

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and the first finding is gonna be

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that you need an unequal policy.

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You, it is no longer true that the same tax

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for everybody is optimal.

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Like if you come the policymaker,

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like if you're the policy designer,

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and if you come, what you want to do is

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to charge a different rate,

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and in particular a progressive, rate so

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that you charge a higher rate on high income households

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and a lower rate.

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Uh, and here I'm talking about a carbon tax,

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so a higher carbon tax on high income households

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and a lower carbon tax, on low income households.

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And this is related to the fact that, one unit

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of consumption is value much more,

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by the low income households.

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Uh, and so you want to take that into account

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and then,

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and that, that's, that come, comes out in the, in the,

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in the, in the optimal carbon tax.

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But then the, as we started like presenting the paper, like,

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people will say, well, but this is not implementable.

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So there is a question of what do you want to do?

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And then a question of, can you do this in the real world?

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Um, and so the, the next thing will be, well,

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everybody's talking about just having a carbon tax.

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We can't, we are not able to put a one carbon tax.

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Imagine if we want to have like an equal

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and like, charge everybody a different tax.

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So, so we said, well, okay, then we can think about maybe

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what if we want the tax to be the same for everybody.

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Um, and then there is a,

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and then we, we solve that problem out.

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Say, okay, we are gonna constrain the, the design of,

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of the, of the tax so

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that we must have the same carbon tax for everybody.

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What is the optimal tax rate in that case?

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Um, and what we see is that like, there is,

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like a concept in economics

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that is called the pian carbon tax, which is just a, well,

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this is an externality.

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We need to have a tax that makes people

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internalize the cost of emissions.

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Uh, and what we find is

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that still the carbon tax is gonna be,

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is the same for everybody.

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It's gonna be a P tax,

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but you need to adjust the tax rate

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to take into account the consumption differences

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across households.

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So it's not gonna be exactly the same rate

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that will prevail in an economy in which everybody is the is

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is equal or is a representative consumer. It has

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To be, be, a attacks that adjust the, the externality

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so that it takes into account difference,

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in consumption across households.

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If I want to compare this with

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what you can find in existing pipers, like, so we,

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we are able to calculate the optimal tax in the economy

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that we have, that tax rate is gonna be

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increasing over time.

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And if you look at existing papers, they don't,

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this will be the, the first paper

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that actually works out the optimal policy design.

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Like existing papers are gonna say, okay, let's try,

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let's just put a $40 per ton of carbon carbon tax,

12:30.385 --> 12:33.485
and then we can calculate, quantify the distributional

12:34.085 --> 12:36.605
distributional impact of this, of this tax.

12:37.105 --> 12:39.165
Uh, but it's an arbitrary carbon tax.

12:39.295 --> 12:40.565
Let's try something higher.

12:41.065 --> 12:44.245
Or maybe let's just try $90 per ton of carbon.

12:44.465 --> 12:48.725
And then there is, a big, body of literature

12:48.725 --> 12:50.285
that studies what do you do

12:50.285 --> 12:52.165
with the revenue of the carbon tax?

12:52.665 --> 12:56.805
Uh, and so what is the optimal way of using that revenue so

12:56.805 --> 12:59.045
that you take into account the distributional impact.

12:59.425 --> 13:01.885
Uh, our paper goes a step like,

13:01.885 --> 13:04.245
before that you say, I want to, I don't want

13:04.245 --> 13:06.245
to think about an arbitrary carbon tax.

13:06.365 --> 13:10.325
I want to think about the best tax that I can have

13:10.595 --> 13:12.765
that takes into account the differences in,

13:12.945 --> 13:14.605
in consumption across households.

13:15.105 --> 13:17.165
Um, and that will be, that is something

13:17.165 --> 13:18.765
that is a contribution of this paper.

13:18.835 --> 13:21.925
It's not a, it's a novel carbon formula. I say.

13:22.345 --> 13:25.325
We also go into a real economy, say, okay,

13:25.625 --> 13:28.765
now we have the formula, the carbon tax

13:28.955 --> 13:33.005
that we ideally want to implement, and then we go

13:33.005 --> 13:35.405
and quantify what is the effect of this,

13:35.405 --> 13:36.965
carbon tax in the economy.

13:37.145 --> 13:40.085
And we are able to put the tax in, in an economy

13:40.085 --> 13:44.525
that we calibrate to replicate existing in equality,

13:44.945 --> 13:48.205
in the us and we extrapolate that to the,

13:48.545 --> 13:50.165
to the world economy.

13:50.905 --> 13:54.485
Um, and what we find quantitatively is two things.

13:54.855 --> 13:58.725
First, and I think we find that this is very important, is

13:58.725 --> 14:02.045
that the, the carbon tax welfare improving, that means

14:02.045 --> 14:03.685
that is good for everybody.

14:04.215 --> 14:05.845
There is no usually, like

14:05.875 --> 14:08.805
what you were asking me about the previous literature, like,

14:08.805 --> 14:11.965
it is like a very common result

14:11.965 --> 14:13.805
that you will find in these papers

14:14.175 --> 14:18.045
where they try arbitrary policies that some there are losers

14:18.185 --> 14:19.405
and winners and losers,

14:19.545 --> 14:22.525
and that, that is why it matters what you do

14:22.525 --> 14:24.045
with the carbon tax revenue so

14:24.045 --> 14:28.045
that you can compensate the losers in our, in our case

14:28.045 --> 14:29.685
with what we find is

14:29.685 --> 14:32.565
that if you design the policy well in the way we are doing

14:32.595 --> 14:35.525
like taking, like, being very,

14:36.045 --> 14:37.365
cautious in the design of the policy

14:37.985 --> 14:41.205
and you implement that, it's gonna be good for everybody.

14:41.205 --> 14:42.805
There are no winners

14:42.805 --> 14:47.005
or losers, everybody wins, even low income households

14:47.105 --> 14:49.645
and everybody wins over time, current generations

14:49.645 --> 14:50.685
and future generations

14:50.745 --> 14:51.745
As well. Um,

14:51.745 --> 14:53.685
so that will be like the, the,

14:54.385 --> 14:56.725
the positive note of the policy.

14:57.465 --> 15:00.405
It is not true that you always will have losers,

15:00.825 --> 15:03.765
but then the negative side of the, of the result is

15:03.765 --> 15:07.885
that quantitatively these policies are not even close

15:08.225 --> 15:11.965
to get, a climate target similar to what we need

15:11.965 --> 15:14.125
for the climate, for the Paris agreements.

15:14.545 --> 15:17.485
So the, the, even though emissions are reduced

15:17.635 --> 15:19.605
with the policy, of course if you have a carbon tax,

15:19.625 --> 15:21.085
the economy is gonna pollute less,

15:21.585 --> 15:23.485
but it's not that that much less.

15:23.545 --> 15:28.485
So it's, we very quickly we go beyond the, the 1.5

15:28.545 --> 15:30.725
or two degrees increase in temperature, which is

15:30.725 --> 15:32.285
what we need to meet the Paris agreements.

15:32.905 --> 15:35.765
So I say like, here, like trying

15:35.765 --> 15:39.285
to go a a step farther in the policy implications is

15:39.285 --> 15:42.125
that if you really want to meet the Paris agreement,

15:42.265 --> 15:44.525
you will need to restrict the policy even more.

15:44.705 --> 15:48.525
So maybe say, I, I I will take into account inequality,

15:48.665 --> 15:51.245
but I also, I want to take into account that there is this,

15:51.835 --> 15:56.805
this cap on temperature that I cannot go beyond as a also

15:56.805 --> 15:58.525
what is the, the policy then?

15:58.525 --> 16:01.845
Because how does the optimal tax looks like if it's not only

16:02.025 --> 16:04.525
the inequality, but also the climate side of the,

16:04.865 --> 16:06.925
of the problem that I want to address and,

16:06.985 --> 16:09.445
and really meet, the Paris agreement.

16:09.825 --> 16:12.245
If we want to think about really about the impact

16:12.245 --> 16:15.725
of the policy on low income households, one part of the,

16:16.665 --> 16:19.645
one part of the problem is it's not only true that,

16:20.105 --> 16:22.805
the carbon tax hurts low income households

16:22.805 --> 16:26.085
because of their, their consumption pattern, but also

16:26.085 --> 16:29.725
because maybe they are also more vulnerable, more vulnerable

16:29.745 --> 16:31.365
to the impact of climate change.

16:31.435 --> 16:33.045
They live in more vulnerable areas,

16:33.625 --> 16:36.525
or even they work in more vulnerable industries.

16:37.025 --> 16:39.605
Or maybe they, they work in industries.

16:39.745 --> 16:42.445
And here I'm saying maybe because I haven't documented this,

16:42.665 --> 16:45.565
but this is kind of a avenues of future research

16:45.625 --> 16:48.805
to see if this is a relevant problem, which it may be.

16:48.865 --> 16:51.845
Low income households also work in highly polluting

16:51.845 --> 16:54.725
industries that are gonna, are gonna be the ones

16:54.725 --> 16:58.205
that face a carbon tax and will have to reduce activities.

16:58.205 --> 16:59.965
And so they might lose their jobs.

17:00.545 --> 17:03.485
And on top of that, they also have to spend like,

17:03.755 --> 17:05.605
more money like paying carbon taxes

17:05.825 --> 17:08.205
and then, the, the distribution

17:08.205 --> 17:09.925
and impact of the policy even worse.

17:10.105 --> 17:12.565
And that is something this paper doesn't have.

17:12.825 --> 17:14.925
We just look at the consumption pattern,

17:15.065 --> 17:17.885
but we don't look at the, at the production side

17:17.885 --> 17:20.565
of the problem where this, where are these people working?

17:21.065 --> 17:26.005
Uh, how, how does the policy affect them on, on the,

17:26.005 --> 17:28.405
on the income side, not on the consumption side.

17:28.785 --> 17:31.005
So I think that's a really cool area

17:31.425 --> 17:32.485
to keep working on this.

Equity in Climate Policy: Addressing Inequalities and Solutions

00:00:00 - Usually we think about, climate change as maybe we are polluting too much. And in economics, that would be the question of, efficiency. Like, we are not doing the, the right thing. and that is true, and for a long time I've been thinking about climate change in that way. But I think more and more as I have been doing research in, in climate policy is, I am convinced that it's more about the, equity side of the problem. That is what makes climate change a problem is it's not so much the fact that we are polluting, but the fact that there are so many, inequities around the problem. And this is true across countries when, you know,

00:00:45 - developing countries. It is true across households and across consumers. it is true, true also across generations, like we are polluting now, and this is gonna cause a cost over future generations. And so that, that side of, the inequalities surrounding the problem is what makes climate change really a very difficult problem to solve. and I guess, the ultimate reason why, I am doing this research is, just trying to think about the problem in that way. When you talk about distribution, like when you, you,

00:01:25 - it could be like a policy and we, face the same policy all of us, and it, it makes, us equally good or equally bad. And that's not the case for climate change. When you put a policy there is, there is gonna be people who benefit more and people who benefit less, but also, especially people who are gonna be heard more by the policy. And, in the context of this paper is gonna be heard more, because of, carbon tax. and, and then the, the, you can think about the distribution of the cost. The policy cost is not equal across the society.

00:02:06 - it's gonna be the, the, the, the cost of the policy. It's gonna be more, relatively more, on low income households compared to high income households. Things about solving the climate problem, but with an eye on equity just to say, well, what, what is the best policy I can design? I mean, one thing would be to say, okay, let's just design the best policy that we can that solves the problem. And then I don't care if people are, are heard differently, this paper says, no, we want to fix the problem. That's the main, that's the first goal is to say, well, what's, what is a policy that is gonna address climate change and is gonna be able to solve it?

00:02:48 - but at the same time, I want to think about a policy that try, that has an eye on, on how different people Are hurt by, by the policy consequences. The literature for a long time was, focused on, because the problem is so big. I mean, you have so many, I mean, climate change, you know, it's, it, it is not an economic pro, it's an economics problem, or it's also a problem from science by, physics is a political problem. So it's, it crosses many, disciplines. so for a long time, at least in economics,

00:03:28 - what we call a representative Asian economy, which is, let's think that we are all alike, like all the laser representative consumer in the representative world. And let's think about the policy in that context. and the main policy implication would be, well, we need a common carbon tax. So it's a carbon tax that is gonna be the same for everybody, for every country, for all generations. It is the same, no, maybe not for all generations. I take that back, he said, but yes, for every in, in, because the tax can change over time, right? But in a given period of time, it's gonna be the same for everybody. It doesn't matter if you are polluting in Argentina or if you are polluting in England.

Understanding Climate Policy Through Economic Inequality

00:04:11 - and, the challenges of thinking about this problem that is not totally, an economic problem because it has this science component, we need to think about the carbon cycle and things and the, and how the temperature increases and, and what are the economic impacts of a, a given temperature increase. so in the last, I would say maybe 10 years, the, the literature is moving into thinking about, climate change with size of heterogeneity. So it can be that maybe countries are different, maybe people are different. Maybe people suffer differently depending on

00:04:50 - and, and once you add the heterogeneity, then the, the, the design of the policy is more involved. and I guess, one thing, like a first, body of literature was thinking about, okay, let's just put a carbon tax and think about the distributional impact. Who is gonna suffer? What is the cost for low income house force or for low income countries or having a carbon tax? but now this paper, the contribution will say, will be to say, well, let's just not think about any arbitrary climate policy in an heterogeneous or qual economy.

00:05:33 - that we want to consider that economy is, has inequality, that is existing inequality. and so the optimal policy design, like trying to think out how do we design the best policy possible? That would be the, the, the contribution of this particular paper. The dimension that calls our attention was, this consumption data. And they Tell you, okay, what, how did I spend my money, right? And did I eat food or energy transportation? Like all the categories, consumption categories per households. and then we combine that data.

00:06:16 - where the family spend that money. And then we wanted to connect that with how that relates to carbon emissions. So that dollar that the person spent, how much carbon did it add to the atmosphere? So we had to combine the consumption data with emissions. The emissions data is not at the consumption level, it's at industry level. So we did, we had to do that mapping from consumption, adding those different consumption categories, connect that to an industry. And then the industry connected to the emissions.

00:06:58 - protection agency going from 670 something expenditure categories to about 400 industry codes, and then from there to carbon emissions. So what we are able to document with this data set is that if you, look at income deciles, and so if you organize people in terms of their income, what we document is that low income households have, consumption basket that is more intensive in carbon emissions. So if you look at the, and that is

00:07:38 - If you look at what, where, what are the consumption categories for low income household, these are gonna be, food, energy transportation, and maybe they just run out of money. Like they buy the those three. And that's all the, the, the, the, the budget. And those are three, three categories that are very high in, in carbon emissions. while if you look at the, higher the size of income, like the wealthier, families, they have those three categories, but maybe those represent 20% of their consumption. And then they have services

Designing Equitable Carbon Tax Policies

00:08:19 - which are less carbon intensive. And then they are not, they, they don't face like a carbon tax on those. and so, yeah, if you look, the relationship you say, you can say there is a, a negative relationship between income and the carbon intensity intensity of consumption. Then we, we decided, okay, let's just write a paper on this. It's like a fact that is, sufficiently important and it's a first order problem for climate, for thinking about climate policy. And then we went into steps First we said, well, we need

00:08:58 - So what is the best that we can do? We want to take into account the fact, the fact that low income households, if we put at carbon tax, are gonna be, are gonna, be, are gonna suffer more. and so we do the, the, the design, the policy design problem. And the first insight that we get there is that as soon as you start thinking about unequal households, the first policy implication and the first finding is gonna be that you need an unequal policy. You, it is no longer true that the same tax for everybody is optimal. Like if you come the policymaker,

00:09:38 - and if you come, what you want to do is to charge a different rate, and in particular a progressive, rate so that you charge a higher rate on high income households and a lower rate. and here I'm talking about a carbon tax, so a higher carbon tax on high income households and a lower carbon tax, on low income households. And this is related to the fact that, one unit of consumption is value much more, by the low income households. and so you want to take that into account and then,

00:10:20 - in the, in the optimal carbon tax. But then the, as we started like presenting the paper, like, people will say, well, but this is not implementable. So there is a question of what do you want to do? And then a question of, can you do this in the real world? and so the, the next thing will be, well, everybody's talking about just having a carbon tax. We can't, we are not able to put a one carbon tax. Imagine if we want to have like an equal and like, charge everybody a different tax. So, so we said, well, okay, then we can think about maybe what if we want the tax to be the same for everybody. and then there is a,

00:11:01 - Say, okay, we are gonna constrain the, the design of, of the, of the tax so that we must have the same carbon tax for everybody. What is the optimal tax rate in that case? and what we see is that like, there is, like a concept in economics that is called the pian carbon tax, which is just a, well, this is an externality. We need to have a tax that makes people internalize the cost of emissions. and what we find is that still the carbon tax is gonna be, is the same for everybody. It's gonna be a P tax, but you need to adjust the tax rate to take into account the consumption differences

00:11:42 - So it's not gonna be exactly the same rate that will prevail in an economy in which everybody is the is is equal or is a representative consumer. It has To be, be, a attacks that adjust the, the externality so that it takes into account difference, in consumption across households. If I want to compare this with what you can find in existing pipers, like, so we, we are able to calculate the optimal tax in the economy that we have, that tax rate is gonna be increasing over time. And if you look at existing papers, they don't, this will be the, the first paper

Optimizing Carbon Tax: Balancing Equity and Climate Goals

00:12:24 - Like existing papers are gonna say, okay, let's try, let's just put a $40 per ton of carbon carbon tax, and then we can calculate, quantify the distributional distributional impact of this, of this tax. but it's an arbitrary carbon tax. Let's try something higher. Or maybe let's just try $90 per ton of carbon. And then there is, a big, body of literature that studies what do you do with the revenue of the carbon tax? and so what is the optimal way of using that revenue so that you take into account the distributional impact. our paper goes a step like,

00:13:04 - to think about an arbitrary carbon tax. I want to think about the best tax that I can have that takes into account the differences in, in consumption across households. and that will be, that is something that is a contribution of this paper. It's not a, it's a novel carbon formula. I say. We also go into a real economy, say, okay, now we have the formula, the carbon tax that we ideally want to implement, and then we go and quantify what is the effect of this, carbon tax in the economy. And we are able to put the tax in, in an economy that we calibrate to replicate existing in equality,

00:13:48 - to the world economy. and what we find quantitatively is two things. First, and I think we find that this is very important, is that the, the carbon tax welfare improving, that means that is good for everybody. There is no usually, like what you were asking me about the previous literature, like, it is like a very common result that you will find in these papers where they try arbitrary policies that some there are losers and winners and losers, and that, that is why it matters what you do with the carbon tax revenue so that you can compensate the losers in our, in our case

00:14:29 - that if you design the policy well in the way we are doing like taking, like, being very, cautious in the design of the policy and you implement that, it's gonna be good for everybody. There are no winners or losers, everybody wins, even low income households and everybody wins over time, current generations and future generations As well. so that will be like the, the, the positive note of the policy. It is not true that you always will have losers, but then the negative side of the, of the result is that quantitatively these policies are not even close

00:15:11 - for the climate, for the Paris agreements. So the, the, even though emissions are reduced with the policy, of course if you have a carbon tax, the economy is gonna pollute less, but it's not that that much less. So it's, we very quickly we go beyond the, the 1.5 or two degrees increase in temperature, which is what we need to meet the Paris agreements. So I say like, here, like trying to go a a step farther in the policy implications is that if you really want to meet the Paris agreement, you will need to restrict the policy even more. So maybe say, I, I I will take into account inequality,

00:15:51 - this cap on temperature that I cannot go beyond as a also what is the, the policy then? Because how does the optimal tax looks like if it's not only the inequality, but also the climate side of the, of the problem that I want to address and, and really meet, the Paris agreement. If we want to think about really about the impact of the policy on low income households, one part of the, one part of the problem is it's not only true that, the carbon tax hurts low income households because of their, their consumption pattern, but also because maybe they are also more vulnerable, more vulnerable

Addressing Equity: The Impact of Carbon Tax on Vulnerable Workers

00:16:31 - They live in more vulnerable areas, or even they work in more vulnerable industries. Or maybe they, they work in industries. And here I'm saying maybe because I haven't documented this, but this is kind of a avenues of future research to see if this is a relevant problem, which it may be. Low income households also work in highly polluting industries that are gonna, are gonna be the ones that face a carbon tax and will have to reduce activities. And so they might lose their jobs. And on top of that, they also have to spend like, more money like paying carbon taxes and then, the, the distribution and impact of the policy even worse.

00:17:31 - We just look at the consumption pattern, but we don't look at the, at the production side of the problem where this, where are these people working? how, how does the policy affect them on, on the, on the income side, not on the consumption side. So I think that's a really cool area to keep working on this.

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