Gini index of 0.63 is one of the highest in the world), inherited from the Apartheid: the city is composed of 46% Black Africans, 40% “Coloured” (Mixed Descent), 13% Whites and 1% Indians/Asians, and inequalities remain strongly correlated with race.

The City of Cape Town faces urban planning and transportation issues. The housing market of Cape Town is extremely segregated, with many low-income households living in informal settlements historically located in areas at the periphery of the city. The government’s answer to this issue has been large-scale housing building programs, aiming at providing new houses for free for low-income households. These houses, typically large (about 40sqm and a 70sqm garden), are mainly built in the periphery of the cities. However, these programs have been insufficient to meet the large demand, and many low-income households keep living in informal settlements. Some households also live in informal settlements in the backyards of these subsidized houses, gaining security against a rent paid to the subsidized houses’ inhabitants. These housing issues combine with transportation issues: low-income households living in subsidized houses, informal dwellings in backyards, or informal settlements are far from employment centers (IRR, 2020), in areas poorly served by public transport (Vanderschuren et al., 2021) and can spend as much as two-thirds of their income on transportation (Teffo et al., 2019).

To illustrate these income inequalities, Table 2 shows the four income classes that we use in this study. These four classes are defined such that only income class 1 (poorest households) is eligible for subsidized housing programs, and only classes 1 and 2 are observed to reside in informal housing, so that they do not correspond to income quartiles. Data on the number of households living in each housing type per income class are not available and can only be deduced from the model (see section 4.2).<sup>2</sup>

|Income class|Annual income range in<br>2011 (ZAR)|Average 2011 income<br>(ZAR, estimated using<br>Census)|Percentage of the total<br>population in 2011<br>(estimated using<br>Census)|
|---|---|---|---|
|1|1 - 38200|19580|38.6%|
|2|38200 - 76400|57300|16.7%|
|3|76400 - 307600|170140|28.9%|
|4|> 307600|780723|15.8%|

_Table 2- Income classes used in the simulation_ The City of Cape Town also faces strong environmental challenges, including a fast urban sprawl that has consequences in terms of biodiversity losses, carbon sequestration, water quality, and transportation emissions increase (City of Cape Town and TDA, 2018). Transportation is the second most emitting subsector in South Africa. In Cape Town, private cars are used in 53% of the commutes, and minibuses/taxis, the second most polluting transportation mode, in 12% of the commutes.<sup>3</sup> However, attempts to mitigate transportation emissions in Cape Town could have large welfare and distributional impacts due to the current lack of affordable transportation options available for low-income households.

> 2 This point is in discussion with the City of Cape Town at the time of the writing of this draft (28/04/2022), but the corresponding data are not available yet.

> 3 <u>https://tdacontenthubstore.blob.core.windows.net/resources/756c7e76-1ab5-45a9-9e97-ecee4e150e79.pdf</u>

4