Distributional impacts of carbon pricing policies under the Paris Agreement: Inter and intra-regional perspectives

Abstract

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 a 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 the 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 2 °C-consistent target increases this number to 1.25%. Global cooperation significantly eases the burden on poor, reducing the poverty headcount by almost three times in the case of 2 °C-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, 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 a 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.