Climate Change Mitigation Policies and Global Poverty

Mitigating the potential impacts of climate change is one of the leading environmental policy concerns of the 21st Century. However, there continues to be heated debate about the nature, content and, most importantly, about the impact of the policy actions needed to limit greenhouse gas emissions. One major contributing factor is the lack of systematic evidence on the impact of mitigation policy on the welfare of the poor in developing countries. This paper provides quantitative evidence on the poverty impacts of climate change mitigation polices. We consider a scenario whereby a carbon price of $27/tCO2eq is applied to all sectors in all Annex I regions along with a forest carbon sequestration subsidy to all regions. Using a novel economic-climate policy analysis framework, we assess the poverty impacts of the above policy scenario on seven socio-economic groups in 14 developing countries. In general, we find that such a policy scenario increases poverty in 11 out of the 14 countries in our sample. There are, however, differences when we decompose the scenario by policy drivers, including Annex I taxes on CO2 emissions, a tax on Annex I non-CO2 emissions coupled with a forest carbon sequestration subsidy in Annex I countries, and finally, a carbon forest sequestration subsidy in the non-Annex I countries, paid for by the rich countries. More specifically, the non-fossil fuel GHG tax in Annex I countries boosts agricultural production and helps reduce poverty in countries where there are large concentration of the poor in the agricultural stratum. The fossil fuel tax in Annex I countries is, on average, poverty reducing in the sample of 14 developing countries considered here, but the magnitude of the impact is much smaller. A combination of both fossil fuel and non-fossil fuel GHG taxes in the Annex I region, is more effective at reducing poverty in developing countries. Our results show that a forest carbon sequestration subsidy in the developing countries leads to increased poverty and that happens to be the dominating sub-component of the policy package. There are two forces at work here. One is that such a subsidy bids land away from agriculture and brings substantial benefits to land owners. However, the elasticity of poverty to income changes to land is very small for most countries and this translates to smaller changes to poverty reduction. Furthermore, the subsidy bids land away from agriculture and leads to decline in output of the sector and hence factor income. For most countries, the latter effect seem to dominate and hence the worsening poverty. The second impact is that the inflow of the transfer creates a “Dutch disease” effect, which affects the manufacturing output negatively and reduces non-agricultural income substantially.