To: Senior Official, The World Bank

Date: October 23, 2022

Policy Memorandum:
Designing pro-poor carbon pricing policies in low-income countries

INTRODUCTION: Carbon pricing policies are powerful tools that can help lower the
harmful emission of carbon dioxide (CO2), which currently makes up 79% of the
greenhouse gasses in the atmosphere.1 Lowering CO2 is critical because, according to
the UN, to limit global warming to 1.5° above pre-industrial levels, we need to achieve
net zero emissions of all global greenhouse gasses by 2050.2 While these policies are
increasing in popularity, many nations have resisted a national carbon price, including
those with historically high rates of emission. Few developing nations have or are
considering implementing carbon pricing. Because the world’s 100 lowest-income
countries only contribute 3.6% of global greenhouse gasses, these nations may see
little reason to curb their CO2 while trying to grow their economy.3 But one notable
aspect of the 2015 Paris Agreement was its call for all nations to contribute what they
can towards lowering their emissions to limit the impacts of global warming. Not only
can carbon pricing help mitigate the impacts of climate change, low-income nations can
see several co-benefits from these policies, including reduced pollution, increased tax
revenue, and an opportunity to invest in green technology in an increasingly
decarbonizing world.

RECOMMENDATION PREVIEW: The World Bank should assist low-income countries

in decarbonizing their economy by creating a framework to adopt and implement a
carbon tax. Revenues from the carbon tax should be recycled to help its low-income
citizens and vulnerable households in the form of a subsidy, cash transfer, income tax
cut, or public infrastructure investments.

Cost/Benefit Analysis

BENEFITS: Many studies have examined the impact that carbon pricing schemes can
have on low-income nations. Benefits of carbon pricing policies include:

● Carbon taxes in low-income nations generally have a progressive outcome,

meaning the richest, highest-emitting citizens are taxed the most while
low-income citizens are impacted the least.4
1
“Overview of Greenhouse Gases.” US EPA, OAR, December 23, 2015.
https://www.epa.gov/ghgemissions/overview-greenhouse-gases.
2
“Net Zero Coalition.” United Nations. https://www.un.org/en/climatechange/net-zero-coalition.
3
Friedrich, Johannes, Ge, Mengpin, and Pickens, Andrew. “World’s Top Emitters Interactive Chart.” World Resources
Institute, December 10, 2020.
https://www.wri.org/insights/interactive-chart-shows-changes-worlds-top-10-emitters.
4
Ohlendorf, Nils, Michael Jakob, Jan Christoph Minx, Carsten Schröder, and Jan Christoph Steckel. “Distributional
Impacts of Carbon Pricing: A Meta-Analysis.” Environmental and Resource Economics 78, no. 1, January 1, 2021,
1–42. https://doi.org/10.1007/s10640-020-00521-1.
 ● Carbon pricing sets a price signal to the markets to avoid “locking in” to outdated,
fossil-fuel intense capital and encourages investments in green technology.5
○ Setting this price signal early in a country’s development will allow it to
participate in an increasingly decarbonizing global economy.
● Pricing schemes allow governments to collect much-needed tax revenue at a
relatively low administrative cost (depending on the taxation model adopted).
○ These tax revenues can be recycled to help its poorest citizens who are
the most likely to be negatively impacted by price increases associated
with a carbon tax.
● Carbon pricing not only helps reduce an economy’s contribution to greenhouse
gasses, but has many co-benefits. For example, reduced coal use due to
taxation will increase air quality.
● Reduction of CO2 emissions helps advance many of the UN Sustainable
Development Goals, including SDG 3, 7, 10, 11, 12 and 13.

COSTS:

● Without carefully designed revenue recycling, carbon taxes could exacerbate

poverty and inequality as prices temporarily increase, even if the overall impact is
progressive. It could also lead to temporary unemployment in certain sectors.
○ Increased energy prices may result in poor citizens using CO2-intense
traditional biomass for energy, which often cannot be taxed.
● Carbon taxes can face strong public resistance if not implemented properly, e.g.
France’s “Yellow Vests” protests in reaction to increased fuel tax.6
● Raising the production costs of tradable goods for domestic firms may make
them less competitive.
● Low-income countries may have less institutional capacity to implement complex
carbon pricing schemes.

Policy options and recommendation

1. Advise low-income nations not to adopt carbon pricing policies. This option
avoids increasing prices, but may “lock-in” nations to adopt carbon-emitting
technology that will become outdated as the world moves to decarbonize.
2. Advise nations to adopt a cap and trade scheme. This helps curb the country’s
emissions, but requires the government to auction emission allowances in order
to generate tax revenue to recycle back to its citizens.
3. Advise nations to adopt a flat tax on carbon. This is more straightforward than
cap and trade and allows a country to collect revenues that can be recycled back
to its citizens, but does not allow a country to set a limit on the total CO2 emitted.

5
Advani, Arun, Prinz, Daniel, Smurra, Andrea, and Warwick, Ross. Institute for Fiscal Studies. “What Is the Case for
Carbon Taxes in Developing Countries?” Institute for Fiscal Studies, November 4, 2021.
https://ifs.org.uk/articles/what-case-carbon-taxes-developing-countries.
6
Mountford, “A Carbon.”
RECOMMENDATION: We recommend that low-income nations adopt policy option #3
in order to curb their emissions, help vulnerable citizens, and develop a green economy.
The World Bank can help by developing a carbon tax framework for nations with limited
institutional capacity. This framework should include:

● Guidelines for how to implement the carbon tax via a fuel tax. This is the most
straightforward and administratively simple method of a carbon tax because
many countries have an existing fuel taxation system. Countries can add a
carbon tax to fossil fuels, such as oil, gas, coal, and their derivative products, and
set the tax rate based on the carbon content of the fuel.
○ Countries should consider a border tariff on competitive imports. This
could follow the general framework of the EU’s Carbon Border Adjustment
Mechanism.
● Guidelines on how tax revenue could be recycled. This could include: universal
subsidies for all households, targeted cash transfers for low-income households,
investments in public infrastructure to help the poor (water, energy access,
education, etc), or income tax cuts.
○ One study found that 30% of carbon tax revenue is sufficient to
compensate poor and vulnerable households, leaving 70% of revenue for
other government needs. 7 More country-specific study is needed to
determine how revenue should be allocated.
○ Tax cuts may not help vulnerable households in nations with already low
income taxes.
● All countries implementing a carbon tax should include steps to consult major
stakeholders as well as the public. A comprehensive communications and public
information plan should be developed to keep the public abreast of impacts and
benefits to them.
● Countries should consider phasing in a carbon tax by taxing only specific sectors
first, e.g. steel and cement production, or by implementing a carbon tax for a trial
period to measure its impact.
● Lastly, this framework should include recommendations for complementary
CO2-reduction policies such as investments in solar energy or taxing luxury
emissions.

7
Vogt-Schilb, Adrien, Brian Walsh, Kuishuang Feng, Laura Di Capua, Yu Liu, Daniela Zuluaga, Marcos Robles, and
Klaus Hubaceck. “Cash Transfers for Pro-Poor Carbon Taxes in Latin America and the Caribbean.” Nature
Sustainability 2, no. 10, October 2019, 941–48. https://doi.org/10.1038/s41893-019-0385-0.
 Bibliography

Advani, Arun, Prinz, Daniel, Smurra, Andrea, and Warwick, Ross. Institute for Fiscal
Studies. “What Is the Case for Carbon Taxes in Developing Countries?” Institute for
Fiscal Studies, November 4, 2021.
https://ifs.org.uk/articles/what-case-carbon-taxes-developing-countries.

Friedrich, Johannes, Ge, Mengpin, and Pickens, Andrew. “World’s Top Emitters
Interactive Chart.” World Resources Institute, December 10, 2020.
https://www.wri.org/insights/interactive-chart-shows-changes-worlds-top-10-emitters.

Mountford, Helen, and Molly McGregor. “A Carbon Price Can Benefit the Poor While
Reducing Emissions.” World Resources Institute, December 15, 2018.
https://www.wri.org/insights/carbon-price-can-benefit-poor-while-reducing-emissions.

Ohlendorf, Nils, Michael Jakob, Jan Christoph Minx, Carsten Schröder, and Jan
Christoph Steckel. “Distributional Impacts of Carbon Pricing: A Meta-Analysis.”
Environmental and Resource Economics 78, no. 1, January 1, 2021, 1–42.
https://doi.org/10.1007/s10640-020-00521-1.

“Overview of Greenhouse Gases.” US EPA, OAR, December 23, 2015.

https://www.epa.gov/ghgemissions/overview-greenhouse-gases.

Vogt-Schilb, Adrien, Brian Walsh, Kuishuang Feng, Laura Di Capua, Yu Liu, Daniela
Zuluaga, Marcos Robles, and Klaus Hubaceck. “Cash Transfers for Pro-Poor Carbon
Taxes in Latin America and the Caribbean.” Nature Sustainability 2, no. 10, October
2019, 941–48. https://doi.org/10.1038/s41893-019-0385-0.