The effect of carbon tax incidence on household energy demand and welfare in the U.S.

Abstract

This study develops a model based on a general equilibrium framework to assess the excess burden of carbon taxes imposed on energy commodities (electricity and natural gas) among residential sector. The model takes into account labor market distortions from the tax and cross-price effects among energy commodities. Using data from the U.S. Residential Energy Consumption Survey, the own-price and cross-price elasticities of energy commodities are estimated. A substitution effect is found between electricity and natural gas, and omitting this effect would overestimate the excess burden of the carbon tax. The results show that the carbon tax behaves differently in affecting the excess burden for low-, middle-, and high-income households. The excess burden is lower for high-income households than for low-income households at lower pre-determined labor tax rates, but the effect is reversed at higher pre-determined labor tax rates. In addition, the empirical results show that the excess burden is different across the nine U.S. regions, while minor gas price changes have no significant effect on the excess burden.