As mentioned above, the dependence on coal inIndiana is quite significant (www.eia.gov), and therefore, the impact of these market-based policieswill also be greater in Indiana than states that have very low dependence oncoal.
However, costs of market-based policies are not evenly distributed foreveryone. Workers and investors in emission-intensive industries of Indianawould see the greatest decrease in demand for their products and hence wouldbear relatively large burdens when the economy adjusted to the tax. These policies will make both producing andusing carbon-intensive products more expensive, also leading to an increase inthe costs of electricity and transportation that involve relatively copiousamounts of CO2 emissions. While these cost increases wouldprovide an incentive for companies to manufacture their products in ways thatresulted in fewer CO2 emissions, it is important to note in case of acarbon tax, that companies that are responsiblefor collecting and paying the tax dollars are not necessarily impacted by thecarbon tax and can simply pass some part of their costs to customers, smallerbusinesses and households.
pdfAccording to a study by NERAEconomic Consulting and the National Association of Manufacturers (NAM), “residents of Indiana will paymore for natural gas, electricity, gasoline and other energy commodities. Thismay be particularly bad formanufacturers consuming most of the energy supply, and for low-income familiesstruggling to get by as the national unemployment rate hovers just under 8percent.” Furthermore, “many Indiana companies that compete internationallywill be placed at a disadvantage as their foreign competitors operate withoutsimilar costs.” http://www.nam.org/Issues/Tax-and-Budget/Carbon-Tax/State-Sheets/indiana/ Coming to the impacts oncommon citizens, it is important to keep into consideration low incomehouseholds, because low income families spend a huge chunk of their incomes onenergy. (Slide 23, lecture B1 (2b)).It is possible to offsetthese impacts caused by market policies on poor, if revenues generated frompolicy are used to offer rebates to the poor.
For example, under the cap and dividend system, public revenuesraised from the sale of pollution credits is rebated to citizens or toconsumers as a subsidy for increasing efficiency. Low-income families may get disproportionately hit bythe carbon tax as well, which is why it is important to offset the pain. Withoutaccounting for how the revenues from a carbon tax would be used, such a taxwould have a negative effect on the economy. (https://www.cbo.gov/publication/44223)However, though this canbe achieved through a lump sum rebate, a lump sum rebate may not beeconomically efficient and therefore the revenues should be recycled to takecare of distortionary taxes like personal income tax. Similar concerns liewith an aggressive cap-and-trade program. Under the auction approach, customersin Indiana will be paying much more due to coal’s higher emissionsA cap-and-trade programmay soften this blow if it would initially provide for more free allowances.
Providing a larger percentage of free allowances rather than a high percentageof auctioned allowances would give time for proven carbon capture technology todevelop over a period of several years. Utilities and customers could worktogether to reduce emissions during this period, such as tapping more renewableresources and implementing energy efficiency programs, while waiting for carboncapture and sequestration technology to emerge. The number of free allowancescan then gradually be reduced over time to ensure utilities and other emittersare indeed focused on reducing emissions.https://www.vectren.com/cms/assets/pdfs/learn_about/environmental_stewardship/carbon_fact_sheet.pdf