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How a carbon tax could fight poverty and climate change at the same time

The money governments currently pour into fossil fuel subsidies could instead be directed to improve health, education, and infrastructure. Taxing carbon would yield more funds on top of that.
July 24, 2018

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Putting a price on carbon could help low- and middle-income countries alleviate poverty and improve their citizens’ lives, a team of German researchers reported July 16 in Nature Sustainability.

The researchers gathered data on how much it would cost to fully implement the United Nations’ Sustainable Development Goals (SDGs) in 68 different countries. The SDGs are benchmarks for improved access to education, clean water, public health, infrastructure, and other basic needs. The amount of investment necessary to reach these goals varies from country to country, as does the proportion of public versus private funding likely to be required.

Armed with this background, the researchers then calculated the amount of revenue each country could make available for development by changing their climate policies.

This analysis came in two steps. First, the researchers considered the impact of removing the fossil fuel subsidies that effectively put a negative price on carbon in many countries.

“Currently, governments subsidize fossil fuels in support of certain industries or to keep fuel prices low for consumers. This is not only a burden for the environment but also for national budgets,” study team member Kai Lessman of the Potsdam Institute for Climate Impact Research said in a press release.

Worldwide, fossil fuel subsidies are worth US$300-680 billion per year, and average US$200 per capita.

In Egypt and Cabo Verde, removing fossil fuel subsidies could completely cover the public financing needs to meet the SDGs.

In Vietnam and Bangladesh, the annual per-capita fossil fuel subsidy of US$35 would cover one-quarter of public financing needs for the development goals. In Pakistan, the US$40 subsidy could be redirected to cover one-third of the necessary public financing.

Other countries where redirecting fossil fuel subsidies to development could have a substantial impact include Togo, Bolivia, the Republic of Congo, Senegal, and El Salvador.

In the second step of the analysis, the researchers calculated how much money governments could raise with a carbon tax consistent with the 2 °C warming target of the Paris Agreement: a median of US$40 per ton of carbon dioxide in 2020, rising to US$175 in 2030.

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The potential for revenue here depends on the emissions intensity of each country’s economy, as well as its overall size.

There are several countries in South and Southeast Asia where removal of fossil fuel subsidies plus a carbon tax could cover more than two-thirds of the public financing needed for development goals. In India, the combination of policies would provide 95% of the needed funds.

In general, the researchers say, carbon pricing would be an especially useful policy tool in countries where opportunities for private investment are scarce. But those also tend to be the poorest countries where the overall need for development funds outstrips the revenue raising potential of the tax.

Even so, there are a number of least developed countries in Sub-Saharan Africa where carbon pricing could contribute more than 20% of the public funds needed for the SDGs, including Burundi, Mauritania, Nigeria, the Republic of Congo, Senegal, Swaziland, Togo, Uganda and Zimbabwe.

In reality, not all of the money from a carbon tax is likely to be available to recycle into development goals. And the analysis doesn’t take into account the effects of reduced income from fossil fuels in exporting countries, nor, on the flip side, increased economic growth that would come with better health, education, and infrastructure.

Still, it suggests that there’s an opportunity for synergy in responding to two of the world’s most pressing, and seemingly disparate, challenges. “If you look at both climate and sustainable development policies at the same time, it turns out that carbon pricing could indeed address both problems simultaneously and effectively,” lead author Max Franks of the Potsdam Institute for Climate Impact Research said in the release.

Source: Franks M. et al. “Mobilizing domestic resources for the Agenda 2030 via carbon pricing.” Nature Sustainability. 2018.

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