Distributional welfare and emission effects of energy tax policies in Brazil

Abstract

Brazilian energy-related GHG emissions have increased sharply in recent decades due to energy tax policies and weather changes. To understand the distributional effects and calculate the cost-effectiveness of these energy tax policies, we assess short-term GHG emissions and welfare impacts of poor and rich households in Brazil. To do this, we calculate the carbon footprint of 128 household products and estimate price and expenditure elasticities using a censored demand system with price corrections and instrumental variables. We analyze the effect of de facto tax and subsidy rates and other environmentally friendly tax policies on end consumer prices. Our findings suggest that taxes on gasoline/diesel pump prices are progressive and have a negative impact on total household energy emissions due to substitution effects. Despite being regressive, changes in electricity and gas/charcoal pricing have considerable effects on household emissions due to the characteristics of the electricity supply in Brazil. More environmentally friendly policies that subsidize ethanol are cost-effective, but have small effects on household emissions.