Rising inequality can make fuel taxes hit harder
New research shows that rising income inequality can make fuel taxes relatively more burdensome for lower-income households. The findings suggest that the fairness of climate policies can change over time, even when the policies themselves remain unchanged.
Climate policies are often judged by how effectively they reduce emissions. But there is another question policymakers need to ask: Who bears the cost over time?
A new study by Julius Andersson, Assistant Professor at the Stockholm Institute of Transition Economics at Stockholm School of Economics and affiliated researcher at the House of Sustainable Society, and Giles Atkinson, Professor at the London School of Economics, shows that rising income inequality can gradually shift the burden of fuel taxes.
The article, published in Environmental and Resource Economics, provides a new framework for understanding why the same tax can have a very different impact across countries, and change over time even when the tax itself remains unchanged.
Shifting the burden to lower-income households
The mechanism is relatively simple. People with lower incomes spend a larger share of their budgets on essentials such as transportation, heating, and food. As income gaps widen, taxes on these everyday necessities tend to fall more heavily on those with fewer resources.
“Climate policies do not exist in a vacuum,” says Julius Andersson. “As society changes, the effects of those policies can change too. A tax that seemed relatively fair when it was introduced may look very different a few decades later.”
To test their model, the researchers examined Sweden's carbon tax on transport fuel, the world's highest carbon tax imposed on households. Using household expenditure data from 1999 to 2012, they found that the burden of the fuel tax shifted over time. As inequality grew, the tax increasingly affected lower-income households relative to higher-income households.
Why inequality matters for climate policy
The findings highlight how two major societal challenges intersect: reducing greenhouse gas emissions and addressing rising inequality.
Carbon taxes are widely regarded as an effective way to reduce emissions from transport and energy use, but public acceptance of these policies often depends on whether people feel that they are being treated fairly. The study suggests that governments should not view the social effects of taxes as fixed. Instead, they should regularly reassess who is affected as economic conditions change.
“If inequality continues to rise, policymakers may need to revisit how environmental taxes affect different groups,” says Andersson. “Measures such as lump-sum transfers or reductions in other taxes can help ensure that climate policies remain both effective and socially sustainable.”
Looking beyond Sweden, the authors compared studies from several high-income countries. It revealed a clear pattern: Countries with higher levels of income inequality tended to have fuel taxes that placed a relatively heavier burden on lower-income groups.
The findings suggest that the effectiveness and perceived fairness of climate policy may depend partly on levels of economic inequality. As countries work to reduce emissions, understanding how inequality shapes people’s experiences of climate policy could become increasingly important.
Research details
“Tax Progressivity of Carbon and Gasoline Taxes: The Role of Income Inequality”
Published in: Environmental and Resource Economics
Authors:
- Julius Andersson, Assistant Professor at the Stockholm Institute of Transition Economics at Stockholm School of Economics
- Giles Atkinson, Professor at the London School of Economics
