Mitigating the Distributional Impacts of Climate Change Policy

Under both a cap-and-trade system and a greenhouse gas tax, the government will regulate energy suppliers and distributors, utility companies, and large manufacturers. These parties will bear the statutory incidence of the regulation. However, the financial impacts of regulating greenhouse gas emissions will be borne primarily by consumers. Consumers will bear the economic incidence of the regulation in the form of increased costs ofgasoline, electricity, and home heating fuels and in increased consumer prices for all goods manufactured or distributed using fossil fuels.

Greenhouse gas regulation will also generate significant revenue. This Article addresses the question of what should be done with those revenues. Models of the economic incidence of the two systems indicate that while high-income households will bear a larger portion of the distributional impacts because they consume more, low-income households will bear a disproportionateb urden as a percentage of their household income. In view of the political challenges associated with redistribution, the practical challenges associated with calculating the net burdens of environmental regulation, and the central importance ofprotecting the least advantaged in society, this Article proposes that the optimal regulatory regime is one that neutralizes the distributional impacts.

The government may achieve this by capturing revenues from a cap-and-trade system or a greenhouse gas tax and using those revenues to issue a rebate that is proportional to household income and scaled according to household size. This Article also suggests that the most efficient method for delivering the rebate is by issuing a refundable tax credit through the income tax system, based on the institutional compatibility of that system with the regulatory and distributional goals of the policy.