What if we start taxing carbon-intensive products such as electricity and gasoline, and at the same time compensate low-income households? Hauke Ward and colleagues did just that in a computer simulation for Peru, with a remarkable outcome. Not only does the approach tackle climate change, but it could also lead to a significant reduction in the poverty headcount. Publication in Energy Policy.
Carbon tax: pros and cons
A tax on carbon-intensive products or activities, such as air travel, is thought to be one of the most effective measures in reducing greenhouse gas emissions, a vital step in combatting global warming. However, low-income households could be hit particularly hard by this measure: in proportion, they usually spend more on carbo- intensive goods – especially in richer countries – and have fewer capabilities to adjust their consumption behaviour. Therefore, Hauke Ward of the Institute of Environmental Sciences and international colleagues Daniele Malerba and Anja Gaentzsch explored ways to fight climate change and poverty simultaneously in a developing country such as Peru.
The researchers combined two types of data: economic network data to trace carbon flows in production processes and a national household survey of Peru to estimate the carbon footprint of Peruvian households.
At first, they simulated the impact of different rates of an economy-wide carbon tax on poverty and income inequality. ‘We determined the additional money that households would have to spend to sustain their consumption,’ says Ward. ‘This can help to identify individual households facing the most severe reductions in purchasing power and welfare.’
Then, the researchers simulated different programmes that the government could use to redistribute the revenues to low-income households, starting from the current programmes such as the conditional cash transfer Juntos – a periodic cash payment to families in poverty. In the best scenario, their combined approach indicates a reduction in the poverty headcount of 17 per cent.
‘Already for lower tax levels, we show that poverty can be significantly decreased if redistribution mechanisms are targeted towards the poorest households,’ says Ward. An important lesson of the study is that the outcomes for poorest households are highly dependent on the combination of both instruments.
‘On top of that, some approaches do not require to re-invest all the carbon income in low-income households,’ says Malerba, who works at the German Development Institute. In this way, part of the tax income can be used for other means. ‘This makes it a feasible and effective method.’
Creating societal support
Reducing poverty whilst fighting climate change seems to be the right thing to do from a humanistic point of view. But there are other reasons as well, Ward states. ‘If society does not support a new policy plan, a policy reform will be infeasible. This could leave countries in a paralysed state, as we have recently seen happen in Brazil and Ecuador.’ And that is exactly what the researchers hope to avoid. ‘Understanding and anticipating societal outcomes of a carbon tax can avoid severe negative effects or conflicts with actors that hold political veto rights,’ says Gaentzsch, who is a postdoc at University Bremen. ‘So it is highly relevant to assess impacts beforehand and come up with adequate solutions to associated problems.’
Ward aims to continue with this type of research. ‘I want to understand the patterns of similar policy packages for other relevant developing countries. In that way, we can come up with individual feasible solutions for the global climate problem.’
Daniele Malerba, Anja Gaentzsch & Hauke Ward, Mitigating poverty: The patterns of multiple carbon tax and recycling regimes for Peru, Energy Policy (16 December 2020)
Header image: Diego Deslo
Text: Bryce Benda