Cash transfers for pro-poor carbon taxes in Latin America and the Caribbean

Carbon taxes are advocated as efficient fiscal and environmental policy tools, but they have proven difficult to implement. One reason is that carbon taxes can aggravate poverty by increasing prices of basic goods and services such as food, heating and commuting. Meanwhile, cash transfer programmes have been established as some of the most efficient poverty-reducing policies used in developing countries. We quantify how governments could mitigate negative social consequences of carbon taxes by expanding the beneficiary base or the amounts disbursed with existing cash transfer programmes. We focus on Latin America and the Caribbean, a region that has pioneered cash transfer programmes, aspires to contribute to climate mitigation and faces inequality. We find that 30% of carbon revenues could suffice to compensate poor and vulnerable households on average, leaving 70% to fund other political priorities. We also quantify trade-offs for governments choosing who and how much to compensate.