Distributional effects of carbon pricing on households: a case study for Brazil under the Paris Agreement goals

Carbon pricing is viewed by many politicians and economists as a cost-effective policy instrument to internalize the costs of climate damage into prices of goods and services (Fischer et al., 2001; Goulder et al., 2019). By inducing producers and consumers to substitute the use of fossil fuels or carbon-intensive products, carbon pricing reduces CO2 emissions and is often regarded as central to design a highly effective policy mix (Wang et al., 2016) to achieve emission targets at relatively low costs (Baranzini et al., 2017). This paper assesses the distributional effects of carbon pricing on Brazilian households. We apply a multi-regional Computable General Equilibrium (CGE) model with representation of multiple households according to a family expenditure survey. Questions of importance for policy makers in Brazil are addressed. What are the economic effects of introducing carbon pricing in Brazil? Is there a double dividend, with economic and environmental benefits, when carbon revenue is recycled through tax rebates? Could carbon revenue contribute to the financing of social spending and to income distribution improvements in Brazil? Results show that carbon pricing avoids further carbon intensive infrastructure lock-in. Lump-sum transfers from carbon revenue help boosting income of lower deciles up to +4.5%, while targeting transfers to most vulnerable groups leads to an income growth of +42.2% by 2030. Our analysis also examines different policy design options and contribute to the policy debate about fiscal reform and socioeconomic effects of carbon pricing in Brazil. The country has a large gap in terms of effective carbon pricing (OECD, 2018) that could contribute to higher public revenues being directly or indirectly transferred to low-income households. These measures would generate a progressive and neutral effect in terms of carbon revenue, and would allow firms and households to adjust their investments and consumption to the new prices.