Improving the design of cash transfers to reduce the regressive effects of a carbon tax in Latin American countries - a look at territorial heterogeneity

ABSTRACT

The distributional effect of carbon pricing jeopardizes its public acceptability in developed and developing countries. Previous research has shown that cash transfers to poor households or targeted subsidies can correct the incidence of carbon pricing on different income groups. However, there has been no in-depth analysis of the territorial heterogeneity of the impacts or how redistributive policies could consider this element in their design. This study addresses this gap in the literature through a microsimulation approach for nine Latin American countries. We find that a carbon tax not only generates regressive effects on household expenditure but that there are also some regions within countries whose populations could be severely affected, exacerbating pre-existing inequalities. The previous is not solved with cash transfers based exclusively on income level criteria. Consequently, a mechanism is proposed to adjust targeted cash transfers according to regional differences, showing that it would contribute to territorial equity.

KEYWORDS:

• Carbon tax
• cash transfer
• distributive impact
• just transition

Keywords:

• Q01
• Q54
• D33

Disclosure statement

No potential conflict of interest was reported by the author(s).

Supplementary data

Supplemental data for this article can be accessed online at https://doi.org/10.1080/00036846.2023.2288062

Data availability statement

Data available on request from the authors.

Notes

¹ Regressivity means that the cost of the carbon tax, relative to total income or expenditure, is higher for low-income groups or that the tax burden is relatively higher in the poorest, which increases equity gaps in society.

² https://carbonpricingdashboard.worldbank.org/map_data.

³ See https://www.financeministersforclimate.org/sites/cape/files/inline-files/IMF-WB%20Coalition%20Note%20-%20Implications%20of%20the%20Global%20Economic%20Crisis%20for%20Carbon%20Pricing.pdf.

⁴ Only the tax is applied to CO₂ emissions, excluding other greenhouse gases.

⁵ Changes in the prices of these sectors are then grouped into a reduced number of sectors through a weighted average.

⁶ https://ourworldindata.org/grapher/carbon-intensity-electricity.

⁷ https://cemeri.org/en/mapas/m-cuanto-cuesta-electricidad-latinoamerica-kt.

⁸ It should be noted that there is a high disaggregation in the use of different types of fossil fuels for heating, cooking, and private transportation.

⁹ See Table A3 on the Online Appendix.

¹⁰ The codes used for the regions available in the surveys in each country are reported in Table A2 (see Online Appendix).

¹¹ One of the reasons that could explain the high participation of food in household expenditure in these countries is the higher preference for consumption of non-durable goods, also reflected in the high expenditure on recreational activities and low expenditure on housing and vehicles.

¹² Carbon tax rate is not adjusted for purchasing power parity.

¹³ See Table A4 in the Online Appendix.

¹⁴ See Table A5 in the Online Appendix.

¹⁵ See Table A5 in the Online Appendix.

¹⁶ The backstop applies to provinces that do not have their own carbon pricing plans that meet federal standards. This system is revenue-neutral since any revenues generated under it stay in the province where they are generated (see PBO 2019).

Additional information

Funding

The work was supported by the Fondo Nacional de Desarrollo Científico y Tecnológico [1220010].