However, carbon pricing tends to disproportionately impact lower-income groups, who spend a greater proportion of their income on carbon-intensive goods, and have less ability to make substitutions towards lower-carbon alternatives.

Policies can be designed to minimize the financial impacts on low-income groups, while maintaining the incentive to reduce emissions. The most effective means of reducing the regressivity of a carbon price (i.e. its disproportionate impact on low-income households) is through lump sum payments to low-income households. The carbon revenues that governments can derive from carbon pricing can also be used to reduce poverty, over and above reducing the policy’s regressive impact on low-income groups.

Key Messages:

• Putting a price on carbon, whether through a carbon tax or a cap-and-trade system, will enable Canada to make significant reductions in greenhouse gas emissions, at a lower marginal cost than command and control regulations.

• However, carbon pricing tends to disproportionately impact lower-income groups, who spend a greater proportion of their income on carbon-intensive goods, and have less ability to make substitutions towards lower-carbon alternatives. How governments use the carbon pricing revenues will determine the financial impacts on low-income households.

• Policies can be designed to minimize the financial impacts on low-income groups, while maintaining the incentive to reduce emissions. Policy options include recycling carbon revenues to tax cuts and refundable tax credits, providing lump sum payments, and subsidizing public transit and other lower-carbon options that reduce costs to low-income groups.

• Researchers have found that the most effective means of reducing the regressivity of a carbon price (i.e. its disproportionate impact on low-income households) is through lump sum payments to low-income households.

• The carbon revenues that governments can derive from carbon pricing can also be used to reduce poverty, over and above reducing the policy’s regressive impact on low-income groups.