## Country Experiences in Designing Carbon Pricing Schemes

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---

### Introduction and key objectives
- The 2015 Paris climate agreement aims to limit future global warming to between 1.5 and 2 ̊C above pre-industrial levels.  
- The average price of emissions worldwide is currently only about US$2 per ton of CO2.  
- Country pledges represent about one third of the emissions reduction needed to achieve under 2 ̊C.  
- Carbon pricing faces major political-economy barriers driven by concerns about impacts on poverty and inequality.  
- The paper uses a simple framework identifying four major channels through which carbon pricing affects poverty and inequality: the consumption channel, the income channel, the health channel, and the revenue recycling channel.

### Baseline considerations
- Two common baseline definitions:
  - Use most recent past (year of household survey) as baseline (static counterfactual).  
  - Build an explicit forward-looking baseline using latest household survey and projections.  
- Baseline characteristics that interact with carbon pricing and affect distributional outcomes:
  - Access to energy: limited access by the poor in developing economies can make carbon pricing appear progressive; improving access in the baseline likely worsens poverty and distributional impacts.  
  - Carbon intensity of consumption goods and services: declining carbon intensity (partly from technological change and fuel switching) reduces price impacts from carbon pricing; explicit baseline assumptions on carbon intensity are essential.

### The consumption channel — mechanisms and empirical findings
- Channel depends on carbon price (T), carbon intensity (ω), pass-through (θ), coverage (R), and interaction with consumption tax (τ).  
- Pass-through (θ):
  - Definition: θ = (P1d − P0) / (ω0 T). Pass-through may be less than, equal to, or greater than 1.  
  - Empirical findings:
    - Kotchen (2021) finds an average pass-through of 0.85 for coal, natural gas, gasoline, and diesel.  
    - Ganapati and others (2020) find around 70 percent of energy price-driven changes in input costs get passed through to consumers on average; sector heterogeneity ranges from 0.36 (gasoline) to 1.87 (cement).  
    - Fabra and Reguant (2014) find costs imposed by the EU ETS are almost fully passed through to consumers in electricity prices.  
    - Stolper (2016) finds pass-through in Spanish retail automotive fuel markets ranges from 70 percent to 115 percent.  
    - Marion and Muehlegger (2011) find at least full, and potentially more than full, pass-through of federal and state diesel and gasoline taxes.  
    - Miller and others (2017) find pass-through in cement industry exceeds one in several U.S. manufacturing sectors.
- Production responses by firms (ω < ω0):
  - Firms may improve energy efficiency and switch fuels, lowering carbon intensity per unit and consumer price impacts.  
  - EU ETS increased low-carbon innovation among regulated firms by as much as 10% in first five years; overall aggregate impact limited in many cases due to low coverage/low prices.  
  - Fuel switching accounted for the majority of emissions reduction under EU ETS in some studies.
- Leakages (R < 1):
  - Incomplete coverage and international trade can reduce domestic consumer price impacts but lower emissions reductions; empirical quantification is limited.
- Demand responses by consumers (C may differ from C0):
  - A carbon price of US$30 per ton of CO2 would reduce carbon emissions by about 14 percent (Sager, 2019), mostly via substitution.  
  - Rebound effects for road transport: short-run about 10–12 percent and long-run about 26–29 percent (Dimitropoulos and others, 2018).  
  - Empirical estimates of distributional differences in demand responses vary substantially.

### The income channel — mechanisms and empirical findings
- Destruction of brown jobs:
  - A gradual carbon tax rising to $50 per ton by 2030 could increase coal-sector job losses relative to 2015:
    - United States: decline in coal-related jobs would increase from 8 to 55 percent.  
    - China: coal-related jobs would decline by 45-percent (instead of very small losses).  
    - India: coal-related jobs would turn from 5-percent growth to a 42-percent decline.  
    - These job losses would amount to 0.3–0.9 percent of economywide employment in China and Poland and less than 0.2 percent in other countries (Fiscal Monitor, 2019).
- Vulnerability of oil-exporting economies:
  - Under a 2°C scenario, revenues could decline between 7 and 9 percent of GDP by 2040 for a group of oil exporting countries.  
- Creation of green jobs:
  - Carbon pricing can increase investment and employment in renewables; British Columbia evidence shows modest positive employment impact with sectoral shifts (Yamazaki, 2017).
- Income gains due to climate improvements:
  - Carbon pricing that reduces climate damages can disproportionately benefit poorer populations who face larger marginal damages and greater reliance on climate-vulnerable sectors.
- Structural changes in factor incomes and skills demand:
  - General equilibrium studies indicate factor income channel can be important and, in some cases, reverse regressive effects to progressive, but results are sensitive to assumptions.  
  - Evidence on demand-for-skills shifts is limited; some studies find substitution toward technical/professional workers and away from manual workers.

### The health channel — mechanisms and empirical findings
- Health co-benefits from reduced air pollution are substantial:
  - WHO: 4.2 million deaths every year occur as a result of exposure to ambient (outdoor) air pollution.  
  - Example: a carbon tax rising to US$70 per ton of CO2 by 2030 in China could reduce annual deaths from fossil-fuel air pollution by one third in 2030 (Parry and others, 2020).  
- Distributional aspects:
  - Low-income and disadvantaged groups face higher exposure and could benefit more, but empirical evidence from existing carbon-pricing schemes is limited and mixed.

### The revenue recycling channel — instruments and distributional effects
- Main recycling measures and findings:
  - Lowering personal income tax (PIT): distributional impact depends on which brackets and the presence of exemptions/deductions; low-income households may not benefit much if they pay little PIT.  
  - Lowering corporate income tax (CIT): evidence suggests CIT cuts can increase income inequality in the United States because capital income gains accrue to top earners; passing CIT changes to wages may be gradual.  
  - Increasing public spending on education and healthcare: impact depends on targeting; expanding access to low-income households can be pro-poor.  
  - Increasing public infrastructure/green investment: impact depends on geographic targeting, sectoral wage profiles, and spillovers; evidence limited.  
  - Strengthening social safety nets or universal transfers: targeted transfers are more cost-effective but require administrative capacity; universal transfers have broader political appeal.

### Attributes of channels and gaps in the literature
- Channels differ by timing, place, nature, heterogeneity, and uncertainty:
  - Timing: immediate (pass-throughs, leakages, revenue recycling), gradual (firm production responses, job destruction/creation), and long-term (climate-related income gains, low-carbon innovation).  
  - Place: fossil-fuel industries and impacts are geographically concentrated; regional support may be needed.  
  - Nature: most channels are monetary, but health and some public investment effects are in-kind.  
  - Heterogeneity: large within-group variations exist (e.g., by race, region, occupation).  
  - Uncertainty: high for innovation responses, structural factor income changes, and some demand responses; leakages understudied.
- Key research gaps:
  - Quantifying firm responses (pass-throughs and production responses) and their transition paths.  
  - Empirical evidence on structural changes in factor incomes and parametrization of general equilibrium models.  
  - Research on leakages via trade and incomplete coverage.  
  - Better evidence on heterogeneity of consumer responses and health co-benefits distribution.

### Policy design implications and lessons from country experiences
- General strategy:
  - Focus detailed analysis and mitigation on the channels most relevant to the country/region.  
  - Prioritize short- to medium-term mitigating measures given initial adverse effects through consumption channel; phase measures out over time as income-channel benefits emerge.  
  - Go beyond averages: design targeted measures for specific highly affected groups if administrative capacity allows.  
  - Start with better-understood channels and err on the side of overcompensation to protect the most vulnerable given uncertainties.
- Policy instruments and guidance:
  - Cash transfers:
    - Targeted, means-tested transfers are most cost-effective but require strong administrative systems.  
    - Categorical or geographic targeting, or (quasi) universal transfers, may be used where administrative capacity is weak.  
  - Facilitate low-carbon consumption choices (e.g., affordable public transport, subsidies for efficient appliances).  
  - Compensating politically salient or heavily affected groups:
    - Support for displaced workers: extended unemployment benefits, training, re-employment services, relocation assistance, healthcare support.  
    - Support for affected regions: site reclamation, temporary local government budget support, geographically targeted investments.

### Cross-country design lessons and notable country-specific numeric details
- Most schemes adopted gradual approaches and started at low initial carbon prices.  
- Nearly all schemes included measures to soften firm impacts; no scheme has implemented border carbon adjustments so far.  
- Only some countries introduced household support measures; low effective carbon prices in some schemes may explain limited household measures.  
- France’s suspension of tax increases in 2018 following public backlash illustrates political sensitivity.
- Country numeric details:
  - British Columbia:
    - Introduced July 1, 2008 at US$10 per ton of CO2; raised to US$36 on April 1, 2021; scheduled to increase to US$40 on April 1, 2022. Revenue-neutral design with tax cuts and targeted credits.
  - China:
    - National ETS launched in 2021 initially covers power sector; free allowance allocation implies no revenue gain initially.
  - Colombia:
    - Economy-wide carbon tax at US$5 per ton introduced 2017, planned to increase to US$11 per ton. Revenue earmarked for Colombia in Peace Fund.
  - France:
    - Carbon tax rose to US$36 per ton in 2017 and was on trajectory to US$97 per ton in 2022 before ramping up was suspended around $50 per ton in 2018; compensation scheme for low-income households introduced in 2015.
  - Singapore:
    - Carbon tax set at US$4 per ton from 2019 to 2023 with plans to increase to around US$8-11 by 2030. Measures include improving energy efficiency of public housing and support to low-income households for efficient appliances.
  - South Africa:
    - Carbon tax rate was US$7 per ton in 2020, increasing until 2022 by CPI plus two percent annually; tax-free allowances ranging 60-95 percent reduce effective rate to US$0.3-1.20 per ton of CO2 for some firms.

### Carbon tax design and revenue use
- "1.20 per ton."  
- The tax will go to the general budget.  
- Most carbon tax revenues will be used to prevent an increase in the price of electricity during the first phase of the carbon tax.  
- Any leftover revenues will fund new energy efficiency initiatives via the budget process.  
- Carbon tax revenues go to the general budget; general budget funds may be used for addressing undesirable distributional consequences of taxation or financing other climate-related measures, including cuts in income and labor taxes and investment in public transportation.

### Sweden: timing, rates, and exclusions
- Carbon tax on motor fuels and heating fuels introduced in 1991 at US$28 per ton (industries covered by the EU ETS are excluded) and increased to US$133 per ton by 2019.  
- Lower rate for industry (at US$7 per ton in 1991) was phased out by 2018.

### Distributional mitigation measures
- Social transfers and increased basic income tax reductions for low- and middle-income households were adopted to address distributional consequences.  
- Use of carbon tax revenues explicitly includes addressing undesirable distributional consequences of taxation.

### Research findings and analytical framework
- The paper uses a simple framework to systemically review channels and sub-channels through which carbon pricing may affect poverty and inequality.  
- The review indicates significant gaps remain, particularly related to firm responses to carbon pricing, structural changes in factor income, and leakages through trade and exemptions.  
- Channels differ in timing, place, nature, heterogeneity, and uncertainty; a blanket assessment on whether carbon pricing is progressive or regressive can be misleading.

### Policy considerations and recommendations
- Consideration (i): Focus on the channels that are most relevant given country-specific conditions.  
- Consideration (ii): Focus initially on the channels that have short- to medium-term effects.  
- Consideration (iii): Policy designs should go beyond the averages due to large variations within income groups.  
- Consideration (iv): Design of policy responses should start with the impacts that are better understood and less uncertain.  
- Emphasize close collaboration between policymaking and research communities to exchange information, close knowledge gaps, and use existing knowledge in policy designs.

### Remaining knowledge gaps and implications
- Significant gaps in understanding firm responses to carbon pricing, structural changes in factor incomes, and leakages through trade and exemptions.  
- Low levels of carbon pricing in many countries may reflect policymakers’ concerns over uncertain impacts on households and firms; several countries have taken a review-and-reevaluate approach.  
- The urgency of climate action implies the need for more ambitious steps and for better integration of distributional policy design into carbon pricing reforms.

*Source — IMF working paper chapter: "Country Experiences in Designing Carbon Pricing Schemes" (source PDF content provided).*

### REFERENCES _____________________________________________________________________________________________26

### REFERENCES _____________________________________________________________________________________________26

### FIGURES
- 1. Pass-Throughs of Carbon Pricing to Consumer Prices: An Illustration____________________ 8
- 2. Production Responses by Firms: An Illustration _________________________________________ 9
- 3. Impact of Carbon Pricing on Employment in the Coal Sector ___________________________12

### TABLES
- 1. Overview of the Channels and Findings in the Literature________________________________17
- 2. Key Attributes of  the Channels _________________________________________________________20

*wpiea2021172-print-pdf - REFERENCES _____________________________________________________________________________________________26*

### 3. Country Experiences in Designing Carbon Pricing Schemes ____________________________24

### 3. Country Experiences in Designing Carbon Pricing Schemes

### Introduction and key objectives
- The 2015 Paris climate agreement aims to limit future global warming to between 1.5 and 2 ̊C above pre-industrial levels.  
- The average price of emissions worldwide is currently only about US$2 per ton of CO2, well below what is needed to reach country emission pledges.  
- Country pledges represent about one third of the emissions reduction needed to achieve under 2 ̊C.  
- Carbon pricing faces major political-economy barriers driven by concerns about impacts on poverty and inequality.  
- The paper uses a simple framework identifying four major channels through which carbon pricing affects poverty and inequality: the consumption channel, the income channel, the health channel, and the revenue recycling channel.

### Baseline considerations
- Two common baseline definitions:
  - Use most recent past (year of household survey) as baseline (static counterfactual).  
  - Build an explicit forward-looking baseline using latest household survey and projections.  
- Baseline characteristics that interact with carbon pricing and affect distributional outcomes:
  - Access to energy: limited access by the poor in developing economies can make carbon pricing appear progressive; improving access in the baseline likely worsens poverty and distributional impacts.  
  - Carbon intensity of consumption goods and services: declining carbon intensity (partly from technological change and fuel switching) reduces price impacts from carbon pricing; explicit baseline assumptions on carbon intensity are essential.

### The consumption channel — mechanisms and empirical findings
- The consumption channel operates via higher consumer prices (PC in the household budget constraint) and depends on:
  - Carbon price (T), carbon intensity (ω), pass-through (θ), coverage (R), and interaction with consumption tax (τ).  
- Pass-through (θ):
  - Definition: θ = (P1d − P0) / (ω0 T). Pass-through may be less than, equal to, or greater than 1.  
  - Empirical findings:
    - Kotchen (2021) finds an average pass-through of 0.85 for coal, natural gas, gasoline, and diesel.  
    - Ganapati and others (2020) find that, on average, around 70 percent of energy price-driven changes in input costs get passed through to consumers over the short to medium term; sector heterogeneity ranges from 0.36 (gasoline) to 1.87 (cement).  
    - Fabra and Reguant (2014) find costs imposed by the EU ETS are almost fully passed through to consumers in electricity prices.  
    - Stolper (2016) finds pass-through in Spanish retail automotive fuel markets ranges from 70 percent to 115 percent and rises monotonically with area-average house prices.  
    - Marion and Muehlegger (2011) find at least full, and potentially more than full, pass-through of federal and state diesel and gasoline taxes to consumers.  
    - Miller and others (2017) find pass-through in cement industry exceeds one in several U.S. manufacturing sectors.
- Production responses by firms (ω < ω0):
  - Firms may improve energy efficiency and switch fuels, shifting supply and reducing carbon intensity per unit, lowering eventual consumer prices.  
  - Evidence of adoption and some innovation exists (e.g., EU ETS increased low-carbon innovation among regulated firms by as much as 10% in first five years), but the overall aggregate impact on innovation and emissions is limited in many cases due to low coverage/low prices.  
  - Fuel switching documented, accounting for majority of emissions reduction under EU ETS in some studies.
- Leakages (R < 1):
  - Incomplete coverage and international trade can reduce domestic consumer price impacts but at cost of lower emissions reductions; empirical quantification is limited.
- Demand responses by consumers (C may differ from C0):
  - Consumers substitute away from emissions-intensive goods; a carbon price of US$30 per ton of CO2 would reduce carbon emissions by about 14 percent (Sager, 2019), mostly via substitution.  
  - Rebound effects are non-negligible: example for road transport shows short-run rebound about 10–12 percent and long-run about 26–29 percent (Dimitropoulos and others, 2018).  
  - Empirical estimates of distributional differences in demand responses vary substantially.

### The income channel — mechanisms and empirical findings
- Destruction of brown jobs:
  - Substantive carbon prices can cause large job losses in fossil-fuel sectors, which are often geographically concentrated.  
  - Illustration: a gradual carbon tax rising to $50 per ton by 2030 could increase coal-sector job losses relative to 2015:
    - United States: decline in coal-related jobs would increase from 8 to 55 percent.  
    - China: coal-related jobs would decline by 45-percent (instead of very small losses).  
    - India: coal-related jobs would turn from 5-percent growth to a 42-percent decline.  
    - These job losses would amount to 0.3–0.9 percent of economywide employment in China and Poland and less than 0.2 percent in other countries (Fiscal Monitor, 2019).
- Vulnerability of oil-exporting economies:
  - Under a 2°C scenario, revenues could decline between 7 and 9 percent of GDP by 2040 for a group of oil exporting countries, with large variation across countries.
- Creation of green jobs:
  - Carbon pricing can increase investment and employment in renewables; evidence includes modest positive employment impact in British Columbia with sectoral shifts from carbon-intensive to non-carbon-intensive sectors (Yamazaki, 2017).
- Income gains due to climate improvements:
  - Carbon pricing that reduces climate damages can disproportionately benefit poorer populations who face larger marginal damages and greater reliance on climate-vulnerable sectors.
- Structural changes in factor incomes and skills demand:
  - General equilibrium studies indicate factor income channel can be important and, in some cases, reverse regressive effects to progressive, but results are sensitive to assumptions (e.g., government transfers, factor substitution rates).
  - Evidence on demand-for-skills shifts is limited; some studies find substitution toward technical/professional workers and away from manual workers.

### The health channel — mechanisms and empirical findings
- Health co-benefits from reduced air pollution are substantial:
  - WHO: 4.2 million deaths every year occur as a result of exposure to ambient (outdoor) air pollution.  
  - Example: a carbon tax rising to US$70 per ton of CO2 by 2030 in China could reduce annual deaths from fossil-fuel air pollution by one third in 2030 (Parry and others, 2020).  
- Distributional aspects of health benefits:
  - Evidence is indicative that low-income and disadvantaged groups face higher exposure and could benefit more, but empirical evidence from existing carbon-pricing schemes is limited and mixed.

### The revenue recycling channel — instruments and distributional effects
- Revenue recycling choices matter for both efficiency and distributional outcomes. Main recycling measures and findings:
  - Lowering personal income tax (PIT): distributional impact depends on which brackets and the presence of exemptions/deductions; low-income households may not benefit much if they pay little PIT.  
  - Lowering corporate income tax (CIT): incidence debate continues; some evidence (Nallareddy and others, 2018) suggests CIT cuts can increase income inequality in the United States because capital income gains accrue to top earners. Passing CIT changes to wages may be gradual.  
  - Increasing public spending on education and healthcare: distributional impact depends on targeting; expanding access to low-income households can be pro-poor.  
  - Increasing public infrastructure/green investment: impact depends on geographic targeting, sectoral wage profiles, and spillovers; evidence limited, though public investment tends to lower inequality in some developing-economy studies.  
  - Strengthening social safety nets or universal transfers: both can mitigate poverty and inequality impacts; targeted transfers are more cost-effective but require administrative capacity and may create disincentives to work; universal transfers have broader political appeal.

### Attributes of channels and gaps in the literature
- Channels differ by timing, place, nature, heterogeneity, and uncertainty:
  - Timing: some effects are immediate (pass-throughs, leakages, revenue recycling), others gradual (firm production responses, job destruction/creation), and some long-term (climate-related income gains, low-carbon innovation).  
  - Place: fossil-fuel industries and impacts are geographically concentrated; regional support may be needed.  
  - Nature: most channels are monetary (income or expenditure), but health and some public investment effects are in-kind, complicating welfare valuation.  
  - Heterogeneity: large within-group variations exist (e.g., by race, region, occupation); focusing on averages can mask highly affected subgroups.  
  - Uncertainty: high for innovation responses, structural factor income changes, and some demand responses; leakages have lower uncertainty but are understudied.
- Key research gaps highlighted:
  - Quantifying firm responses (pass-throughs and production responses) and their transition paths.  
  - Empirical evidence on structural changes in factor incomes and parametrization of general equilibrium models.  
  - Research on leakages via trade and incomplete coverage of schemes.  
  - Better evidence on heterogeneity of consumer responses and health co-benefits distribution.

### Policy design implications and lessons from country experiences
- General strategy for policy design:
  - Focus detailed analysis and mitigation on the channels most relevant to the country/region, with near-term impacts and lower uncertainty.  
  - Prioritize short- to medium-term mitigating measures given initial adverse effects through consumption channel; phase measures out over time as income-channel benefits emerge.  
  - Go beyond averages: design targeted measures for specific highly affected groups if administrative capacity allows.  
  - Start with better-understood channels and err on the side of overcompensation to protect the most vulnerable given uncertainties.
- Policy instruments and guidance:
  - Cash transfers:
    - Targeted, means-tested transfers are most cost-effective but require strong administrative systems.  
    - Categorical or geographic targeting, or (quasi) universal transfers, may be used where administrative capacity is weak.  
  - Facilitate low-carbon consumption choices (e.g., affordable public transport, subsidies for efficient appliances).  
  - Compensating politically salient or heavily affected groups:
    - Support for displaced workers: extended unemployment benefits, training, re-employment services, relocation assistance, healthcare support.  
    - Support for affected regions: site reclamation, temporary local government budget support, geographically targeted investments to create alternative economic opportunities.
- Cross-country design lessons (summary of seven schemes: British Columbia, China, Colombia, France, Singapore, South Africa, Sweden):
  - Most schemes adopted gradual approaches and started at low initial carbon prices.  
  - Nearly all schemes included measures to soften firm impacts (tax cuts, exemptions, low initial rates); no scheme has implemented border carbon adjustments so far.  
  - Only some countries introduced household support measures; low effective carbon prices in some schemes (e.g., China, Colombia, South Africa) may explain limited household measures.  
  - France’s suspension of tax increases in 2018 following public backlash illustrates political sensitivity and the need to address poverty and inequality implications.
- Notable country-specific numeric details:
  - British Columbia: introduced July 1, 2008 at US$10 per ton of CO2; raised to US$36 on April 1, 2021; scheduled to increase to US$40 on April 1, 2022. Revenue-neutral design with tax cuts and targeted credits.  
  - China: national ETS launched in 2021 initially covers power sector; free allowance allocation implies no revenue gain initially.  
  - Colombia: economy-wide carbon tax at US$5 per ton introduced 2017, planned to increase to US$11 per ton. Revenue earmarked for Colombia in Peace Fund.  
  - France: carbon tax rose to US$36 per ton in 2017 and was on trajectory to US$97 per ton in 2022 before ramping up was suspended around $50 per ton in 2018; compensation scheme for low-income households introduced in 2015.  
  - Singapore: carbon tax set at US$4 per ton from 2019 to 2023 with plans to increase to around US$8-11 by 2030. Measures include improving energy efficiency of public housing and support to low-income households for efficient appliances.  
  - South Africa: carbon tax rate was US$7 per ton in 2020, increasing until 2022 by CPI plus two percent annually; tax-free allowances ranging 60-95 percent reduce effective rate to US$0.3-1.20 per ton of CO2 for some firms.

*Italic: Source — IMF working paper chapter: "Country Experiences in Designing Carbon Pricing Schemes" (source PDF content provided).*

### 1.20 per ton.

### wpiea2021172-print-pdf - 1.20 per ton.

### Carbon tax design and revenue use
- "1.20 per ton."
- The tax will go to the general budget.
- Indication that most carbon tax revenues will be used to prevent an increase in the price of electricity during the first phase of the carbon tax.
- Any leftover revenues will fund new energy efficiency initiatives via the budget process.
- Carbon tax revenues go to the general budget. General budget funds may be used for specific purposes linked to the carbon tax, such as addressing undesirable distributional consequences of taxation or financing other climate-related measures, including cuts in income and labor taxes and investment in public transportation.

### Sweden: timing, rates, and exclusions
- Carbon tax on motor fuels and heating fuels introduced in 1991 at US$28 per ton (industries covered by the EU ETS are excluded) and increased to US$133 per ton by 2019.
- Lower rate for industry (at US$7 per ton in 1991) was phased out by 2018.
- A lower initial rate for industry (at US$7 per ton) and the adjustments during following years take into account competitiveness concerns.

### Distributional mitigation measures
- Social transfers and increased basic income tax reductions for low- and middle-income households were adopted to address undesirable distributional consequences of the carbon tax.
- Use of carbon tax revenues explicitly includes addressing undesirable distributional consequences of taxation.

### Research findings and analytical framework
- The paper uses a simple framework to systemically review the channels through which carbon pricing may affect poverty and inequality.
- The framework includes four main channels: the consumption channel, the income channel, the health channel, and the revenue recycling channel, with sub-channels embedded within the main channels.
- The review indicates significant gaps remain, particularly related to firm responses to carbon pricing, structural changes in factor income, and leakages through trade and exemptions.
- The channels differ in timing, place, nature, heterogeneity, and uncertainty of their impacts; therefore, a blanket assessment on whether carbon pricing is progressive or regressive can be misleading.

### Policy considerations and recommendations
- Consideration (i): Focus on the channels that are most relevant given country-specific conditions as it would be challenging to consider all the channels.
- Consideration (ii): Focus initially on the channels that have short- to medium-term effects.
- Consideration (iii): Policy designs should go beyond the averages due to large variations within income groups.
- Consideration (iv): Design of policy responses should start with the impacts that are better understood and less uncertain.
- Emphasize that policymaking and research communities need to work closely together to exchange information, close knowledge gaps, and use existing knowledge to the fullest extent in policy designs.

### Remaining knowledge gaps and implications
- Significant gaps in understanding firm responses to carbon pricing, structural changes in factor incomes, and leakages through trade and exemptions.
- Low levels of carbon pricing in many countries may reflect policymakers’ concerns over uncertain impacts on households and firms; several countries have taken a review-and-reevaluate approach.
- The urgency of climate action implies the need for more ambitious steps and for better integration of distributional policy design into carbon pricing reforms.

*Source: wpiea2021172-print-pdf - 1.20 per ton.*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021172-print-pdf.pdf_