Are Carbon Taxes Good for South Asia?

This paper estimates the effects of gradually introducing a US$25/ton CO2-equivalent carbon taxin South Asian economies using the Climate Policy Assessment Tool (CPAT). The results for South Asia suggest thatmonetized welfare co-benefits net of efficiency costs from such a tax—regardless of what other economies or regionsdo—are resoundingly positive, at 1.4 percent of GDP in 2030. Revenues from the carbon tax are estimated at 1.3 percent ofGDP in 2030, which is substantial for a region with a low tax-to-GDP ratio. Once these revenues are recycled, theKeynesian multiplier effect through increased public investment and transfers to households is associated withslightly positive net economic growth rate effects. Household incidence analysis shows that the carbon tax canbe designed as an equity-enhancing policy, given net reductions in the Gini coefficient for consumption fromrevenue recycling. The carbon tax is also associated with a 2 percent weighted average input cost increase acrosseconomic sectors in 2030. Finally, the paper discusses selected results on and the political economy of acomprehensive energy price reform package (fossil fuel subsidy phaseout and carbon tax), with broad guidance on itsimplementation. Overall, the paper provides supportive evidence for the green transition, showing that there neednot be a trade-off between inclusive growth and going green in South Asia.