The Impacts of Carbon Taxes and Cash Transfers on Poverty and Inequality Across Years: A Peruvian Case Study

Abstract

Carbon taxes could be key policies to achieve ambitious climate goals. Yet their distributional and poverty impacts need to be addressed. This can be achieved by redistributing tax revenues to households though cash transfers. Nevertheless, the right design of a cash transfer scheme depends on the distribution of carbon footprints and the consequent tax impacts, which in turn depend on temporal and economic factors. Therefore, the time dimension, i.e. the year considered by the study, may influence the estimated distributional patterns and associated policy recommendations. To fill the existing research gap, we assess the distribution of carbon footprints, and the impact of the carbon tax and its combination with cash transfers on poverty and inequality for three years (2004, 2007 and 2011) for Peru. We show that, in a context of rapid economic growth, footprints increase over time, particularly for lower deciles. Most importantly, the distributional impacts of a reform combining carbon tax and cash transfers change by year, driven by inflation, production and consumption patterns, as well as the distribution of income. The paper concludes that, to maximize poverty and inequality reduction, the design of cash transfer programs and tax levels need to be adapted over time.

Keywords: Poverty, Inequality, carbon pricing, Social protection, Peru, environmental fiscal reform