Paper short abstract:

Through a global simulation, we show that a carbon tax plus revenue redistribution through existing and expanded social protection systems can significantly lower poverty; but investments in social protection are needed to spur such effects, together with international redistribution.

Paper long abstract:

Social protection are always advocated as import to mitigate negative effects of climate policies. As one important example, carbon taxes are a crucial environmental tax and policy option for curbing carbon emissions, but can deepen poverty and inequality; revenue recycling through social protection is proposed to offset these regressive impacts. Yet practical implementation issues remain largely unexplored and recycling mechanisms are explored using ideal mechanisms (per capita redistribution) and neglecting mostly the global dimension.

We implement an innovative quantitative approach by constructing and using a Social Accounting Matrix-based model, merging data from household surveys, consumption surveys, and I-O tables for 168 countries. We then simulate different type of carbon taxes (consumption versus production taxes, luxury taxes versus uniform taxes, nationally differentiated taxes), different national revenue recycling mechanisms (per capita redistribution, redistribution using current and COVID-19 social assistance programs), and different global revenue recycling mechanisms through a global fund (using different justice criteria).

Our findings indicate that paring a luxury consumption tax with revenue recycling through an expanded social assistance system as during the COVID-19 pandemic could achieve the most substantial reduction in extreme poverty. Furthermore, establishing a global carbon tax revenue fund financed by developed nations and distributed to lower income countries based on poverty headcounts could markedly reduce poverty and inequality both within and between countries. However, substantial improvements in social assistance systems are urgently needed, especially in Sub-Saharan African countries. Overall, this study provides a viable pathway for synchronizing carbon mitigation with social protection and poverty alleviation.