Changing carbon footprints and the consequent impacts of carbon taxes and cash transfers on poverty and inequality across years: A Peruvian case study

Carbon taxes are key policies to achieve climate goals. Yet, they increase prices especially in the short term, and can affect households’ income depending on their carbon footprints. Cash transfer programs can be used to address adverse social impacts and protect the poorest. However, because carbon footprints, and the consequent tax impacts, may change over time it is important to understand how to design and adapt such cash transfer programs accordingly. As the existing studies focus on single years, we address the gap in the literature in two steps. First, we estimate changes in carbon footprints and their drivers over time; second, we simulate the effects of a carbon tax in combination with cash transfers on poverty and inequality for the years 2004, 2007 and 2011 in Peru. We combine a bottom-up household carbon footprint estimation, and multiple scenarios simulation. 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. 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.