Distributional Impacts of Carbon Pricing in Low- and Middle-Income Countries

The climate targets agreed upon in the Paris Agreement will eventually need to be backed by ambitious climate policies. Putting a price on carbon and abolishing subsidies on fossil fuels is usually widely agreed upon by economists to be the economically efficient solution (High-Level Commission on Carbon Prices 2017). An increasing amount of countries, including low- and middle-income economies (LMICs), have already introduced (or plan to do so) carbon pricing schemes. Yet, the introduction of carbon pricing schemes frequently triggers concerns regarding the distributional justice of climate policy. The question of distributional effects relates closely to the political feasibility of reforms. A regressive carbon price would not only be problematic from a perspective of equity and justice but very likely also be deemed to fail politically. Yet, as it has usually been developed countries that discuss pricing mechanisms, not much is known regarding the particularities of carbon pricing schemes in LMICS. At the same time, the World Bank reports an increasing number of active and planned carbon pricing instruments (CPI) in LMICs (World Bank 2021). Argentina, Chile, Colombia, Mexico, and South Africa have implemented carbon pricing, although with relatively small effective prices and, with the exception of South Africa, narrow tax bases that cover only a small share of jurisdictional emissions. China, the only Asian country among the LMICs with a CPI in place, has now initiated the world’s largest carbon market. Other countries such as Brazil, Indonesia, Vietnam, Thailand, Pakistan, Turkey, Senegal, and Côte d’Ivoire are currently considering the introduction of carbon taxes or emission trading schemes (ETS).