Making carbon pricing fair in rural and urban areas
In previous blogs, we’ve explored how carbon pricing is expected to affects households with different income-levels and how different revenue recycling options can address potential fairness issues for low-income households. In this last blog of the series, we address additional fairness issues such as the impact on rural and urban households.
There are multiple dimensions to household fairness
When thinking about carbon pricing and household fairness, the most popular definition is in terms carbon costs in proportion to household budget. However, there are other ways to slice household fairness. One of those is to consider how the carbon costs differ for households living both in rural versus urban areas.
Households residing in rural areas might drive more frequently and for longer distances, given their limited access to public transportation. Or they might have greater home-heating costs if more remote areas have lower average temperatures. As carbon pricing will raise the price of these fuels, rural households could face larger carbon costs than households in urban areas.
So, are there important differences between the impacts on rural and urban households?
Our recent research paper on provincial carbon pricing and household fairness uses economic modelling to assess the impact of a $30 carbon price on households residing in areas of different size. We consider households in Alberta, Manitoba, Ontario and Nova Scotia.
Figure 3 presents the estimated household’s costs before any revenue recycling. It shows the carbon costs separately for households in large urban areas (those with a population of more than 100,000), households in small urban areas (those with a population of less than 100,000), and households residing in rural areas.
Our analysis suggests that for any individual province, household carbon costs do not vary significantly across areas of different size. As shown in panel A and B, this result holds whether we measure carbon costs as a share of annual income or expenditures (for an explanation the differences of results between provinces, see our previous blog).
This result is broadly consistent with the findings of a recent study on the impact of B.C.’s carbon pricing policy on rural versus urban households in BC. It finds that rural households in B.C. bear only a slightly larger burden of British Columbia’s carbon tax than do households in large urban areas. The study also finds, however, that the revenue-recycling scheme implemented by the province is sufficient to compensate these households and that the additional Northern and Rural Homeowner Benefit program is therefore unlikely to be necessary.
The fact that carbon costs for households do not vary significantly across rural and urban areas suggests that this dimension might not be the main priority for carbon pricing fairness issues. Our research suggests that fairness is more important in terms of lower income versus higher income households than in terms of rural versus urban households.
As provincial governments implement and ramp up carbon pricing policies, it is critical for them to identify their most vulnerable households (whether they are rural and/or low-income). Because of provincial economic and provincial differences, these household groups could be different. And more importantly, our research shows that fairness issues do not need to be a barrier to policy as they can be easily addressed using a small portion of revenue generated from a carbon price.