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Carbon Taxation, Prices and Household Welfare in New Zealand - WP 04/23

4 Welfare Analysis of a Carbon Tax

This section examines the effects of a carbon tax on the welfare of different household types at different levels of total weekly expenditure, along with overall inequality measures. A summary of the theory behind these welfare measures and their computation may be found in Appendix B.

4.1  Welfare Changes

Tables 5 and 6 summarise the welfare changes that arise from each of the three carbon tax rates. The analysis was conducted using ten expenditure levels ranging from $200 to $1400, though for convenience only three values are shown in the tables for each of the eighteen household types. The welfare changes for those households who recorded a positive weekly expenditure on tobacco are provided in Table 5, while Table 6 outlines the welfare changes for non-smoking households. The equivalent variation, , is given together with its ratio to total expenditure, .[12] The tables show that the welfare loss ranges from approximately 0.38 percent of total expenditure in the case of a $7 carbon tax to 1.4 percent in the case of a $25 carbon tax.

The relationship between and provides an indication of the disproportionality of the welfare impact of the carbon tax within each household type. A rising profile may be described as progressive. Within each household type, the profile of with is similar for each of the three carbon tax rates.

For nine non-smoking households and six smoking household types, the ratio decreases with . This suggests that the carbon tax may be slightly more regressive among non-smoking households. However, for the majority of household types, the carbon tax proves to be neither strictly regressive nor progressive. The column adjacent to gives the increase in tax paid per week, . The tables show that for any given carbon tax rate and level of expenditure, the increase in tax paid does not vary substantially between household types.

The marginal excess burden of the carbon tax, , is the difference between the equivalent variation and the increase in tax paid, . Households, both smoking and non-smoking, with low to moderate expenditure levels incur similar excess burdens independent of type. However among those households (smoking and non-smoking) with high levels of weekly expenditure, three groups incur significantly higher marginal excess burdens.

The burdens incurred by households with one child rise with expenditure at a greater rate than the burdens incurred by households with no children. Figure 4 compares the marginal excess burdens that arise from a $25 carbon tax incurred by households with one child and those with none, across one and two adult smoking households.


  • [12]As shown in Appendix B, this ratio is equal to the percentage change in a money metric utility measure, when pre-change prices are used as reference prices.
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