Climate policy reduces inequality in lower-income countries

New MCC study examines distributional effects of CO2 price reform for over 80 countries.

Photo: Shutterstock/AntonIvanov

12.12.2018



The public acceptance of a CO2 tax reform especially depends on its impact on the poorer segments of society. A new study examines the direct and indirect distributional effects of a carbon price reform on fossil fuels for 87 low- and middle-income countries.

Contrary to existing fears, the new MCC study "Poverty and distributional effects of carbon pricing in low and middle-income countries - A global comparative analysis" shows that the distributional effects especially in lower-income countries would be progressive: richer households would pay a larger share of their income as tax than poorer households. Existing income inequalities would therefore be reduced in the long-term rather than increased. The study covers 75 percent of the world's population and over 90 percent of the poorest people living below US$ 3 a day.

The effect can mainly be explained by the fact that low-income households spend less on energy, such as gasoline or electricity, in percentage terms. Consumption of food, goods or services, on the other hand, is less significant. However, the study also shows that this effect is reversed in higher-income countries. Above a certain income, the share of energy expenditures in total income decrease and poorer households are more heavily burdened than wealthier ones.

The authors therefore point to the important role of redistributive policy instruments in mitigating potential social costs. Higher income countries, which tend to have higher emissions, usually have better financial resources and institutional capacity to redistribute revenues. However, also in poorer countries, the social dimension is very important. "A tax of US$ 30 per ton of CO2 would reduce the disposable income of the lowest income group in most low-income countries by as much as 2.5 percent," says Ira Dorband, lead author of the study. "Part of the revenues generated by the CO2 tax should be used to cushion the social impact," emphasizes co-author Matthias Kalkuhl.

The results have important implications for international climate policy. The introduction of a carbon price might actually be easier to manage politically when countries are still at an early development stage. "CO2 pricing would be the right instrument even in today's poor countries to ensure that they do not build a fossil energy industry in the first place," said Jan Steckel, head of the working group Climate and Development and also author of the study.

Reference of the cited article:
Ira Irina Dorband, Michael Jakob, Matthias Kalkuhl, Jan Christoph Steckel: Poverty and distributional effects of carbon pricing in low- and middle-income countries – A global comparative analysis, World Development, Volume 115, March 2019, Pages 246-257, https://doi.org/10.1016/j.worlddev.2018.11.015

Weblink: https://www.sciencedirect.com/science/article/pii/S0305750X18304212

Sign up for the MCC newsletter.