Why a carbon tax and dividend is progressive

Suppose you have a very simple society consisting of just three citizens:

Mr Poor lives in a bedsit in Peckham and is very poor. He doesn’t cook, just lives on cereal, biscuits and Dorritos but very occasionally treats himself to a kebab. He gets around by bike or takes the bus. His carbon footprint is 3 tonnes CO2e per year.

Mr Average lives in a not very well insulated terraced house in Crystal Palace, sometimes drives, likes to travel but tries not to fly if he can help it and spends a lot of time on the internet. His annual emissions come to 6 tonnes.

Mr. Rich lives in a big detached house in Dulwich but he also owns a home in the Cotswolds which he drives to each weekend in his SUV. He puts a total of 12 tonnes of CO2e into the atmosphere each year.

Let’s say you set your carbon tax at £100 per tonne CO2e. Then Mr Poor will pay £300 in tax, Mr Average £600 in tax and Mr Rich £1200 in tax. Adding those together you’ve got a total carbon tax take of £2100 which you now divide into 3 equal dividends to be paid out to your 3 citizens, so each of them receives £700.

That £700 is £400 more than Mr Poor paid in tax so he’s £400 better off and heads out for an extra large doner to celebrate. Mr Average is £100 better off but poor Mr Rich finds himself £500 worse off.