Winners and losers: the distributional impacts of a carbon tax in Brazil

Through its NDC, Brazil pledged to reduce its GHG emissions by 43% below 2005 levels in 2030, respectively. Carbon pricing could play a key role in meeting this objective. However, a range of issues can emerge when introducing it. Among these issues, the distributional impact has been frequently highlighted as an obstacle to the public acceptance of such a mitigation policy. This paper examines the short-run welfare and emission effects of an economy-wide carbon tax on Brazilian households. The distributional impact is examined by estimating the tax burden relative to annual expenditures and changes in total GHG emissions across income levels, using tax rates consistent with the Paris Agreement and considering a lump-sum rebate that keeps the government revenue neutral. For this, we calculate energy-related GHG emissions coefficients from fossil fuel burning for the whole household consumption basket, and price and expenditure elasticities which account for the zero-expenditure and underdeclaration problems. Our results indicate that the incidence of the carbon tax is effective in reducing emissions in the short run, but imposes welfare losses, especially on the poor. The consideration of compensation mechanisms is critical when designing this type of environmental tax, specially in the context of a highly complex tax-system.