Optimal emissions pricing in LMICs accounting for household emissions from traditional cooking

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Pricing environmental externalities to reduce fossil fuel emissions might entail negative outcomes for other development targets, such as health and poverty. This proposal asks what would be optimal levels of fuel pricing, taking into account effects on household welfare across the income distribution and differences in energy use, particularly regarding household cooking choices. We aim to i) examine optimal fuel prices for multiple low- and middle-income countries correcting for various externalities; ii) compare energy demand responses to optimal fuel pricing for multiple countries drawing on household survey data; iii) evaluate planned fuel taxation and social protection schemes, which enables studying the demand responses of probable compensation mechanisms. We draw on micro-scale expenditure and price data for nine developing countries to estimate quadratic almost ideal demand systems (QUAIDS) and update existing estimates on externalities by the IMF to include consumer responses to multiple, simultaneous increases in fossil fuel prices. Keywords: Fossil Fuel Subsidy Reform, Carbon Pricing, Distributional Impacts, Biomass

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Environment for Development initiative
Project | 7 December 2023