Summary: Governments that impose taxes on carbon dioxide and other greenhouse gas emissions can benefit from a cleaner, more climate-friendly environment and a revenue stream that can be tapped to lower other taxes and create jobs. But environmental taxes may also exact an excessive financial burden on low-income households, which spend a much greater fraction of their budgets than richer households do on heating oil, natural gas and electricity. This concern has limited the use of green taxes in Spain, where emissions are taxed at levels far below average for the European Union, which seeks to lower emissions across the continent to fulfill its 2015 Paris Agreement climate pledge.

Now a new study by researchers at the University of Oldenburg (Germany), the Basque Center for Climate Change, and the MIT Joint Program on the Science and Policy of Global Change shows that low-income households in Spain can actually benefit from environmental taxes if revenues are redistributed to all taxpayers. Using a computational model to assess the environmental and economic impacts of a green tax reform policy in which revenues are recycled in equal amounts to households in annual lump-sum payments, the researchers found that the policy significantly reduces emissions without imposing economic hardship on any segment of the population.