Improving the design of cash transfers to reduce the regressive effects of a carbon tax in Latin American countries - a look at territorial heterogeneity

The distributional effect of carbon pricing jeopardizes its public acceptability in developed and developing countries. Previous research has shown that cash transfers to poor households or targeted subsidies can correct the incidence of carbon pricing on different income groups. However, there has been no in-depth analysis of the territorial heterogeneity of the impacts or how redistributive policies could consider this element in their design. This study addresses this gap in the literature through a microsimulation approach for nine Latin American countries. We find that a carbon tax not only generates regressive effects on household expenditure but that there are also some regions within countries whose populations could be severely affected, exacerbating pre-existing inequalities. The previous is not solved with cash transfers based exclusively on income level criteria. Consequently, a mechanism is proposed to adjust targeted cash transfers according to regional differences, showing that it would contribute to territorial equity.