Twentieth International Conference on Environmental, Cultural, Economic & Social Sustainability

Abstract

Carbon pricing generates direct distributional effects due to the increase in household expenditure on emission-intensive goods and indirect ones due to the change in the productive structure that affects labor income. Some previous studies have compared the rise in household expenditure in multiple countries without considering the change in income. In contrast, the present research calculates the simultaneous changes in consumption expenditure and labor income to obtain an indicator of the increase in expenditure adjusted for purchasing power and also analyzes income distribution changes. For the above, a methodology that combines the environmental extension of the Leontief price model, elasticities, and microsimulations is used in twelve Latin American countries. The results show that a carbon tax of USD 50/ton would increase household expenditure and reduce labor income paid by many economic sectors in all countries. The most affected countries are the Dominican Republic, Bolivia, Peru, Chile, Argentina, and Mexico, since they have a relevant thermoelectric generation in their energy matrix. In contrast, the least affected countries are those with high hydropower penetration, such as Paraguay, Uruguay, Ecuador, Costa Rica, Brazil, and Colombia. In almost all countries, the tax has a regressive impact on expenditure adjusted for purchasing power, mainly affecting the poorest quintile of the population. Different income distribution indicators reflect improvement equity in most Latin American countries. Still, it is pro-poor due to the generalized drop in labor income. The countries with the most remarkable change in income distribution are the Dominican Republic, Chile, Ecuador, and Peru.