To avoid a regressive impact, governments must stop relying solely on consumption-based taxes, like carbon levies on heating fuel or petrol. While these drive behavior change, they hit poor households hardest because energy costs take up a larger slice of their income. Instead, funding should shift toward progressive revenue streams.
One effective approach involves taxing carbon-intensive capital gains or windfall profits from fossil fuel companies. This redirects wealth from polluters toward the public purse. Policymakers can then use these funds to subsidize upfront costs for low-income families. For example, providing direct grants for heat pump installation or electric vehicle rebates specifically targeted at lower deciles ensures that the transition doesn't feel like a penalty for being poor.
Public procurement also plays a role. Governments are the largest buyers in many markets. By using state funds to bridge the price gap between old and new technologies, the state can drive down costs through economies of scale. This lowers the market price for everyone. Ultimately, the goal is to use revenue from those most capable of paying to de-risk the technology for everyone else. This keeps the transition equitable.
