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Paper short abstract:

We compute the first global study estimating the poverty and inequality effects of a carbon tax and different revenue recycling mechanisms. We show that poverty can be significantly decreased, but social protection programs in lower income countries and international transfers are key.

Paper long abstract:

The global policy debate on just transitions is concerned with how to achieve a socially just and acceptable transition toward a climate-neutral and climate-resilient global economy. Public acceptability of climate policies is key to their implementation, but it depends to a large extent on the perceived fairness of such policies. Recycling revenues from carbon taxes directly back to vulnerable households is likely to gain the approval of a large number of people, especially in low-income countries where the high proportion of the population involved in the informal economy means that lowering income tax does not benefit the poorest and most vulnerable sections of society. But the targeting of these direct transfers needs careful consideration.

Here, we assess the impact on poverty and inequality of a global carbon tax and national redistribution of revenues to vulnerable households. We look at different options for such redistribution, including a lump sum payment, the use of current social assistance programmes, and an expansion of social assistance following COVID-19. We find that a carbon tax of US$50/tCO2 without revenue redistribution could increase global extreme poverty, but the redistribution of revenue from such a carbon tax could substantially reduce poverty by more than 100 million people, and reduce inequality, depending on the scenario. This shows that the way in which revenue from a carbon tax is redistributed greatly affects its impact, underlining the importance of policy design and targeting mechanisms. We also show the importance of international transfers alongside national redistribution.