Poverty, Inequality and the Decarbonization of Economic Development

Low and middle income countries are responsible for more than two thirds of global greenhouse gas (GHG) emissions. Although climate stabilization is now impossible without effective climate mitigation policies in developing countries, they are in conflict with developing countries’ legitimate development goals. With economic growth being a major explanatory variable for both GHG emissions and poverty alleviation, developing countries face a difficult but critical trade-off with consequences for their inhabitants’ livelihoods and global climate change trajectories. With this thesis I seek to contribute to the understanding of this dual challenge by analyzing the relationship of poverty, inequality and GHG emissions on the household level in three countries, India, Mexico and Indonesia. The dissertation has 5 chapters, one introductory chapter and 4 separate papers. In all chapters I employ partial equilibrium models with a maximum of detail in terms of household heterogeneity and energy demand. To lay the ground for the emission accounting from the demand side, the second chapter describes the calculation and analysis of carbon footprints for Indian households. Estimates of household CO2 emissions caused by the direct use of energy or indirectly through the consumption of other goods are rare for developing countries. Addressing this research gap I apply an environmentally extended input-output analysis matched with Indian household expenditure data to estimate the carbon footprint for households in the years 2004/05 and 2011/12. An estimation of income dynamics further identifies the scale effect to be the major emission driver but the composition effect to be of importance as well due to rising demand for direct energy such as electricity and private motorized transport. The third chapter starts out with a closer look at welfare effects of carbon taxes in Mexico by simulating an input-output model coupled with household survey data. The currently effective tax rate is small and has negligible effects on household welfare. Higher simulated tax rates, maintaining the current tax base, show a slight progressivity but welfare losses remain moderate. Welfare losses, regressivity and poverty rise more with widening the tax base towards natural gas and other greenhouse gases (CH4, N2O) through food price increases. For a complete analysis of the policy, I simulate a redistribution of calculated tax revenues and find that the resulting effects become highly progressive, also for high rates, wider tax bases and even in the absence of perfect targeting of social welfare programs. Chapter 4 builds on chapter 3 but deals with the weaknesses of the modelling framework, which is incapable of estimating household responses to policy induced price changes. Additionally, I analyze not only the effects of environmental taxes on household welfare but also on carbon emissions at the household level for the case of Mexico. I find first-order approximations of welfare effects to provide reasonable estimates, in particular, for carbon taxes. Analog to evidence in other low- and middle-income countries, the taxation of all energy items is found to be regressive with the exception of motor fuels. The analysis of the emission implications of different tax scenarios indicates that the short-run emission reductions at the household level can be substantial – albeit the effects depend on how revenue is recycled. Considering the large effect of food price increases on poverty and the limited additional emission saving potential, the inclusion of CH4 and N2O in a carbon tax regime is not advisable. In the final chapter, using extended methodology from the other chapters in one piece of analysis, I put the spotlight on energy subsidies in Indonesia. I study welfare, energy poverty, and CO2 emissions implications of energy price change scenarios. The analysis extends previous work of energy price and subsidy removal impacts at the household-level in several ways. First, by employing a household energy demand system (QUAIDS) the analysis shows considerable heterogeneity of welfare impacts. For gasoline and electricity, first-order calculations are overestimating welfare effects by 10-20 percent with price changes between 20 and 50 percent. This holds particularly for gasoline and for richer households, which have higher usage rates. Second, the results point at another source of impact heterogeneity due to the ownership of energy-processing durables. Poor households that own these goods may be hit particularly strong by energy price rises. Third, I extend the welfare analysis beyond the money metric utility effects and look at energy poverty understood as a condition of missing or imperfect access to reliable and clean modern energy services. By drawing on the estimated demand function, I find substantial effects of price increases on energy poverty. Fourth, the analysis explicitly considers the emission effects of the energy price scenarios. Albeit these effects are estimated with some uncertainty it turns out that reduced household energy demand implies a substantial reduction in emissions. The analysis thus indicates that energy taxes may serve as an effective mitigation instrument, but are accompanied with important adverse welfare effects that can, however, be cushioned by appropriate compensation policies.