Cash transfers in the context of carbon pricing reforms in Latin America and the Caribbean

Abstract

One reason carbon prices are difficult to implement is that they might imply high additional costs on poor and vulnerable households. In response, studies often highlight that recycling revenues through cash transfers can render carbon pricing reforms progressive. This neglects that existing cash transfer programs target households from low-income groups imperfectly and that impacts of a carbon price are heterogeneous within income groups. In this study, we analyze if existing cash transfer programs can help to alleviate distributional effects of carbon pricing in 16 Latin American and Caribbean countries. We find that carbon pricing is regressive in 11 countries and progressive in 5. Most importantly, differences within income groups exceed differences between them. Beyond total household expenditures, car ownership and cooking fuel usage explain the variance in carbon pricing impacts. We show that households who are most affected by carbon pricing, some of them poor, do not necessarily have access to existing cash transfer programs. We suggest that governments aiming to compensate households should consider broadening the coverage of existing cash transfer programs, utilizing in-kind transfers or removing other distortionary taxes.