We take the City of Cape Town, South Africa, as a case study. Cape Town is a rapidly sprawling city, with an extremely high level of inequalities (income-based Gini index of 0.63 in 2011, UN-Habitat Global Indicators Database 2020<sup>1</sup> ). This translates into transportation and segregation issues; low-income households often living far from employment centers and being limited to use slow transportation modes as they cannot afford private cars. In addition, the housing market of the City of Cape Town is characterized by the coexistence of formal, subsidized, and informal housing, resulting in strong locational constraints for the people that cannot afford formal housing because informal and subsidized housing is only possible in some locations in the city.

We find that spatial inequalities can reinforce income inequalities. In the short run, households are more negatively impacted by the fuel tax if they earn low incomes or if they live far from employment centers. In the medium and long term, there is a persistence of spatial and income inequalities: the poorest households, living in informal settlements or subsidized housing, have few or no ways to adapt to changes in fuel prices by changing housing types, adjusting their dwelling sizes or locations (as informal or subsidized housing is only possible in some locations), or shifting transportation modes and employment locations. Low-income households living in formal housing are also impacted by the tax over the long run, due to complex effects driven by the competition with richer households on the housing market. These mechanisms are summarized in Table 1 and will be detailed throughout the paper.

|Timeframes|**Short term**|**Medium-term**|**Long te**|**rm**|
|---|---|---|---|---|
|Mechanisms|Direct impacts<br>of the tax|Job location<br>and transport<br>mode<br>adjustment|Rents adjustments|Dwelling sizes and housing<br>locations adjustment|
|Main drivers|• Low-income<br>households<br>more affected.<br>• Households<br>living in<br>periphery more<br>affected.|• Households<br>more affected<br>by direct<br>impacts (low<br>income, living<br>in periphery)<br>adapt more.|• Households living in<br>subsidized housing cannot<br>adapt.<br>• Real estate prices increase<br>near employment centers,<br>with negative impacts for<br>tenants and beneficial impacts<br>for owners.<br>• Low-income households<br>living in formal housing are<br>the losers of the competition<br>with other income classes on<br>the formal private housing<br>sector.|• Households living in<br>subsidized housing,<br>informal settlements, or<br>backyarding have fewer<br>opportunities to adapt due<br>to dwelling size and land-<br>use constraints.<br>• Low-income households<br>living in formal housing are<br>the losers of the<br>competition with other<br>income classes on the<br>formal private housing<br>sector.|

_Table 1- Summary of the impacts of the tax on inequalities._

# 2. Context: The City of Cape Town

The city of Cape Town is a middle-income city of 4.2 million residents located in South Africa, facing multiple demographic, economic, social, and environmental stakes. First, the city is sprawling because of the legacy of the Apartheid-era urban planning with low-income households living in the urban periphery and a population growth rate of 2% annually mainly fueled by rural-urban migration in South Africa and by migrations from other African countries. The city has also an extremely high level of inequalities (its

> 1 <u>https://data.unhabitat.org/pages/social-inclusion-indicators, accessed 25/04/2022.</u>

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