Distributional Impacts of Carbon Pricing Policies Under Paris Agreement: Inter and Intra-Regional Perspectives

Abstract

While bringing multiple benefits for the environment, achievement of the stringent global greenhouse gas emissions reduction target, like the one outlined in the Paris Climate Agreement, is associated with significant implementation costs and could impact different dimensions of human well-being, including welfare, poverty and distributional aspects. In this paper, we analyze the poverty and distributional impacts of different carbon pricing mechanisms consistent with reaching the Paris Agreement targets. We link a global recursive dynamic computable general equilibrium model ENVISAGE with the GIDD microsimulation model and explore three levels of mitigation effort and five carbon pricing options (trade coalitions). Results suggest that while there is a higher incidence of poverty in all scenarios, mainly driven by lower economic growth, Nationally Determined Contribution (NDC) policies result in progressive income distribution at the global level. Such progressivity is caused not only by lower relative prices of food versus non-food commodities, but also by a general decline in skill wage premia. Achievement of the NDC targets without regional cooperation results in 0.45% increase in the number of people living in extreme poverty (below PPP$1.90/day) by 2030, while a more ambitious 2oC-consistent target increases this number to 1.25%. Global cooperation significantly eases the burden on poor, reducing the poverty headcount (additional number of people leaving in extreme poverty) by almost three times in the case of 2oC-consistent target and bringing it to the baseline scenario level in the case of NDC target. The global Gini coefficient falls between 0.01 and 0.04 percentage points depending on the mitigation effort and collaboration mode, while reduction in the Theil index is between 0.01 and 0.11 percentage points. Results also indicate that the reductions in inequality come mainly from reduction in income from top earners, as the results are much more sensitive to the NDC policies closer to the top of the income distribution.