Poverty and inequality implications of carbon pricing under the long-term climate target

Abstract

Many countries have taken stringent climate policies to minimize the risks by climate change. But these policies could burden households and the poor with the extra costs and threaten their wellbeing. However, the consequences of climate policies on poverty and welfare loss are seldom presented in stringent long-term climate change mitigation projections. Carbon pricing is a cost-effective approach; how it affects households varies among countries. This study investigated the distributional effects and poverty implications of carbon pricing in China during the transition towards carbon neutrality and the Paris Agreement’s long-term goals. We assessed multiple poverty and equity standards in future scenarios with a newly developed integrated assessment model. It was found that climate change mitigation efforts would not greatly hinder poverty alleviation in China, with the poverty headcount under the $3.2/cap/day-threshold being less than 0.3 million people in 2050 in most scenarios. A carbon tax became a regressive factor mainly due to price increases in food and energy goods. This indicates that the distributional effects on carbon pricing should be considered. For example, supplementary policies that compensate for price changes, such as subsidies and early mitigation actions, that lead to modest price increases in the long term are worthy of consideration as valid instruments for the just transition towards the 2 °C or even 1.5 °C pathway.