The study highlights how carbon taxes, while a potentially useful tool in reducing emissions, increase the cost for consumers directly, and indirectly, by raising the prices of goods and services. It further highlights how the effects are felt more by poorer households.
Imposing a carbon tax, consistent with the Paris Agreement goals, could generate more than USD100 billion in revenue per year in 16 countries in Latin America and the Caribbean region—enough to close the water, sanitation, or electricity access gap. However, on average, the study finds that food prices tend to make carbon taxes regressive. The indirect impacts of carbon taxes on food, public transportation, and electricity would cost households more than the direct impacts on fossil fuels. Nonetheless, the authors cite evidence that adequately compensating negatively-affected households with complimentary policies can enable the reforms to succeed.
The study explores four potential methods using models to study options ranging from the redistribution of carbon revenues to cash transfers, including carbon rebates and different iterations of cash transfer programs. The authors find that in the region studied, 30 percent of the carbon revenues could suffice to compensate poor and vulnerable households on average, leaving 70 percent to fund other priorities. According to the study, international experience, beyond normative views, suggests that any government project to implement carbon taxes without a plan to compensate affected households, at least partially, is unsustainable.