Improving the estimation of the distributional impacts of carbon pricing and targeted transfers to reduce its regressivity in Latin American countries

This study simulates the distributional impacts of a carbon tax and targeted cash transfers to reduce its regressivity in ten Latin American countries. Unlike previous studies, the traditional top-down methodological approach is complemented with various elasticities to improve the precision of household expenditure and income changes. The results show that the increase in food and electricity prices are the ones that contribute the most to the rise in household expenditure in most of the countries analyzed. Also, it is shown that the omission of the shock on labor income causes an underrepresentation (overrepresentation) of the distributive impact of carbon pricing on the poorest (richest) households. Finally, it is concluded that cash transfers focused on quintile 1 reduce the regressive effect of this climate policy more strongly.