How to make a carbon tax reform progressive: The role of subsistence consumption

- Poor households spend a larger share of their income on carbon intensive goods.
- Therefore carbon taxation is often considered regressive.
- We use a small analytical model in which we analyze this hypothesis.
- We compare the distributional impacts of 3 distinct designs of a carbon tax reform.
- A carbon tax reform can be both re- or progressive, depending on its design.

This letter analyzes the distributional effects of a carbon tax reform when households must consume carbon-intensive goods above a subsistence level. The reform is progressive if revenues are recycled as uniform lump-sum transfers, in other cases it is regressive.