Carbon pricing: a disproportionate burden on the poor

A carbon-pricing scheme could be implemented, unless the resulting carbon penalties merely burden consumers without meaningfully advancing the green transition.

Carbon pricing should penalize fossil fuel consumption by corporations. This policy must be implemented with caution, as companies cannot rapidly transform their production processes and would only pass the sudden added costs on to consumers. Low-income households, already burdened by persistently low wages, would be disproportionately impacted, as energy costs constitute a significant portion of their budgets.

Any carbon-pricing strategy that unfairly burdens low-income households risks triggering political backlash. Governments are particularly concerned about the potential rise of radical opposition among workers who have felt excluded from economic growth for decades. So far, governments have not implemented significant carbon pricing to replace the phased-out subsidy programs.

Carbon pricing experiments, primarily targeting large corporations in the EU[1] and select US states[2], have yielded controversial results.

To date, carbon-pricing initiatives have imposed relatively modest penalties. Most corporations choose to pay these fees and pass the costs on to consumers rather than invest in costly green technologies. Few companies invest in reducing their reliance on fossil fuels, as doing so would likely raise production costs more than for competitors who choose to pay the lighter penalties. In either scenario, the financial burden ultimately falls on end users, including low-income households.

Carbon-pricing experiments have not yet demonstrated effective change without merely shifting costs to consumers. This shortcoming has led governments to hesitate on widespread carbon pricing, instead waiting for the prices of green products to decline.

The significant gas price surges following the war in Ukraine have not driven a green transition.

Since 2021, the sharp increases in oil and natural gas prices have effectively acted as a significant carbon pricing mechanism, resembling the kind of carbon tax that was long considered essential for advancing the green transition. However, this price hike was not the result of bold government policy but rather the rapid post-COVID economic recovery and sanctions on Russia due to the Ukraine war.

Despite this de facto carbon tax, there has been no significant progress toward a net-zero economy. Instead, European governments have even provided financial relief to support ongoing fossil fuel consumption.