A Rural Myth? The Perceived Unfairness of Carbon Taxes in Rural Communities

Abstract

There is a widespread perception that a carbon tax hits rural households disproportionally hard due to the greater dependence of these households on car travel and increased fuel needs for home heating. Yet remarkably little analysis of the regional welfare impacts of carbon taxation exists, which begs the question: Is the alleged unfairness toward remote communities merely a 'rural myth'? We investigate the distributional effects of the carbon tax in British Columbia (BC) using a computable general equilibrium model of the Canadian economy. Since implementation of the tax in 2008, municipal politicians and local interest groups have claimed that it placed an unfair burden on rural communities. However, our results suggest that the revenue recycling scheme introduced in parallel with the tax was sufficient to compensate rural households, and that the Northern and Rural Homeowner Benefit Program, a transfer program that was introduced later in response to public protests, was neither necessary nor effective in stopping the injustice claims from tax opponents. We conclude that the regional incidence of a carbon tax must be analyzed carefully to support the design of adequate revenue recycling programs and to minimize the risk of overcompensating household groups based on a 'rural myth'.