Carbon Tax Fairness Changes as Income Inequality Grows

A new study suggests that carbon tax fairness is not fixed. Instead, it changes as income inequality rises or falls. Researchers found that carbon and gasoline taxes become more regressive over time when income gaps widen, especially for everyday necessities such as transport fuel. The findings could help governments design fairer climate policies by pairing carbon taxes with targeted financial support where needed. The study was conducted by Julius J. Andersson of the Stockholm School of Economics and the Stockholm Institute of Transition Economics, and Giles Atkinson of the London School of Economics and Political Science.

Why Carbon Tax Fairness Matters

Carbon taxes are widely viewed as one of the most effective ways to reduce greenhouse gas emissions. By making fossil fuels more expensive, they encourage households and businesses to switch to cleaner alternatives.

Yet carbon taxes have long faced criticism because they can place a larger financial burden on lower-income households. Fuel, heating, and electricity are basic necessities for many families, meaning poorer households often spend a larger share of their income on these essentials.

Until now, most studies have measured whether carbon taxes are progressive or regressive at a single point in time. The new research argues that this approach misses an important factor: income inequality itself changes over time. As societies become more unequal, the distributional impact of an existing tax can also change, even if the tax rate stays exactly the same.

How Rising Inequality Changes Carbon Tax Fairness

The researchers developed a simple economic model showing that two factors determine how fairly an indirect tax is distributed. The first is the level of income inequality across households. The second is how spending on a taxed product changes as income rises, known as the income elasticity of demand.

When the taxed product is a necessity, such as gasoline in high-income countries, rising income inequality causes the tax burden to become increasingly concentrated among lower-income households. In contrast, taxes on luxury goods become more progressive as inequality grows because wealthier households spend proportionally more on those items.

This means carbon tax fairness is dynamic rather than permanent. A tax introduced during a period of relatively equal incomes may become much less equitable decades later if inequality increases.

Sweden Offers a Natural Test Case

To test their theory, the researchers examined Sweden’s carbon tax on transport fuels between 1999 and 2012. Sweden introduced its carbon tax in 1991 and now has one of the world’s highest carbon tax rates. During the following decades, however, income inequality increased significantly, creating an opportunity to observe whether the tax became more regressive over time.

Using national household expenditure data, the researchers found a strong relationship between rising inequality and increasing regressivity. When tax burdens were measured against annual income, the carbon tax became steadily more regressive as income inequality increased. Statistical analysis showed an exceptionally strong negative correlation between the two measures.

The study also showed that the choice of welfare measure matters. When annual household expenditure was used instead of annual income, the same tax appeared much less regressive, and in several years even progressive. Because spending is more evenly distributed than income, this changes how the burden is measured.

Evidence Extends Beyond Sweden

The researchers also compared previous studies of gasoline taxes across several high-income countries. Countries with higher income inequality consistently showed more regressive gasoline taxes than countries with lower inequality.

The United States, which has comparatively high income inequality, showed some of the most regressive outcomes. Denmark and Sweden, with lower inequality during the study periods, showed much smaller distributional impacts.

This broader comparison suggests that differences between countries may be explained not only by fuel prices or tax rates, but also by differences in how income is distributed.

Key Research Findings

• Rising income inequality makes carbon and gasoline taxes on essential goods increasingly regressive over time.
• Sweden’s carbon tax became more regressive between 1999 and 2012 as income inequality increased.
• Measuring tax burdens using household expenditure instead of annual income makes carbon taxes appear considerably less regressive.
• Cross-country evidence shows that higher-income inequality is strongly associated with more regressive gasoline taxes across developed economies.
• The researchers’ theoretical model helps explain why previous studies have reported different results across countries, time periods, and measurement methods.

What the Findings Mean for Climate Policy

The study has important implications for governments planning long-term climate policies.

Carbon taxes remain one of the most efficient tools for reducing emissions. However, policymakers should recognise that carbon tax fairness can change over time even when the tax itself remains unchanged.

As income inequality grows, governments may need to strengthen complementary policies such as lump-sum rebates, carbon dividends, targeted transfers, or reductions in other taxes. These measures could help preserve both fairness and public support for climate action.

The findings also suggest that distributional analyses should be updated regularly rather than treated as permanent assessments made only when a tax is introduced. Monitoring changes in inequality could become just as important as monitoring emissions reductions when evaluating climate policy.

Read the Full Research

Read the complete study, “Tax Progressivity of Carbon and Gasoline Taxes: The Role of Income Inequality,” published in Environmental and Resource Economics (2026), to explore the full theoretical model, Swedish case study, and international comparisons.

Meet the Researchers

• Assistant Professor Julius Andersson — Stockholm School of Economics; Stockholm Institute of Transition Economics, Sweden.
• Professor Giles Atkinson — Department of Geography and Environment; Grantham Research Institute for Climate Change and the Environment; Global School of Sustainability, London School of Economics and Political Science, United Kingdom.

Further Reading

Readers interested in the broader implications of this research are encouraged to explore the policy briefs published by the FREE Network.

• Carbon Tax Regressivity and Income Inequality
• Income Polarization and Climate Policy Backlash
• Revisiting the Impact of Rising Gasoline Prices on Swedish Households
• Road Congestion Pricing with A Public Transport Cashback Mechanism
• Navigating Environmental Policy Consistency Amidst Political Change

These publications examine a wide range of topics related to environmental economics, climate policy, carbon pricing, taxation, and public policy, translating academic research into accessible, evidence-based analysis for policymakers and the general public.