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P R W P 10462

Are Carbon Taxes Good for South Asia?

Valerie Mercer-Blackman

Lazar Milivojevic

Victor Mylonas

South Asia Region

Oce of the Chief Economist

May 2023

Public Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure Authorized

Produced by the Research Support Team

Abstract

e Policy Research Working Paper Series disseminates the ndings of work in progress to encourage the exchange of ideas about development

issues. An objective of the series is to get the ndings out quickly, even if the presentations are less than fully polished. e papers carry the

names of the authors and should be cited accordingly. e ndings, interpretations, and conclusions expressed in this paper are entirely those

of the authors. ey do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and

its aliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

P R W P 10462

is paper estimates the eects of gradually introducing

a US$25/ton CO2-equivalent carbon tax in South Asian

economies using the Climate Policy Assessment Tool

(CPAT). e results for South Asia suggest that mone-

tized welfare co-benets net of eciency costs from such

a tax—regardless of what other economies or regions do—

are resoundingly positive, at 1.4 percent of GDP in 2030.

Revenues from the carbon tax are estimated at 1.3 percent

of GDP in 2030, which is substantial for a region with

a low tax-to-GDP ratio. Once these revenues are recy-

cled, the Keynesian multiplier eect through increased

public investment and transfers to households is associ-

ated with slightly positive net economic growth rate eects.

Household incidence analysis shows that the carbon tax

can be designed as an equity-enhancing policy, given net

reductions in the Gini coecient for consumption from

revenue recycling. e carbon tax is also associated with a

2 percent weighted average input cost increase across eco-

nomic sectors in 2030. Finally, the paper discusses selected

results on and the political economy of a comprehensive

energy price reform package (fossil fuel subsidy phaseout

and carbon tax), with broad guidance on its implementa-

tion. Overall, the paper provides supportive evidence for the

green transition, showing that there need not be a trade-o

between inclusive growth and going green in South Asia..

is paper is a product of the Oce of the Chief Economist, South Asia Region. It is part of a larger eort by the World

Bank to provide open access to its research and make a contribution to development policy discussions around the world.

Policy Research Working Papers are also posted on the Web at http://www.worldbank.org/prwp. e authors may be

contacted at vmercerblackman@worldbank.org.

Are Carbon Taxes Good for South Asia?

Valerie Mercer-Blackman1

Lazar Milivojevic2

Victor Mylonas3

Keywords: carbon tax, climate change, decarbonization, energy transition, South Asia, fiscal incidence,

revenue recycling, fossil fuel subsidy reform

JEL Classification: E62, H22, H23, Q43, Q54

_________________________________________________________________________________

1/ The World Bank, email: vmercerblackman@worldbank.org; 2/ The World Bank, email: lmilivojevic@worldbank.org;

3/ International Monetary Fund (IMF) and The World Bank, email: vmylonas@worldbank.org. The authors thank Yi

(Claire) Li for excellent research assistance, and Paolo Agnolucci (The World Bank), Defne Gencer (The World Bank),

Dirk Heine (The World Bank), Jules Hugot (Asian Development Bank), Tom Moerenhout (The World Bank), Ian Parry

(International Monetary Fund), Margaret Triyana (The World Bank), and Hans Timmer (The World Bank) for helpful

comments. The authors also thank participants at: i) the ADBI Conference on the Energy Market, Energy Pricing,

and Low-Carbon Transition; ii) the Development Economics Prospects Group (The World Bank) internal seminar; and

iii) the South Asia Chief Economist Office internal seminar (The World Bank) for helpful discussions. This paper builds

on work initiated in the context of the Spring 2022 South Asia Economic Focus (World Bank, 2022a). All remaining

errors are our own.

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PolicyResearchWorkingPaper10462AreCarbonTaxesGoodforSouthAsia?ValerieMercer-BlackmanLazarMilivojevicVictorMylonasSouthAsiaRegionOfficeoftheChiefEconomistMay2023PublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedPublicDisclosureAuthorizedProducedbytheResearchSupportTeamAbstractThePolicyResearchWorkingPaperSeriesdisseminatesthefindingsofworkinprogresstoencouragetheexchangeofideasaboutdevelopmentissues.Anobjectiveoftheseriesistogetthefindingsoutquickly,evenifthepresentationsarelessthanfullypolished.Thepaperscarrythenamesoftheauthorsandshouldbecitedaccordingly.Thefindings,interpretations,andconclusionsexpressedinthispaperareentirelythoseoftheauthors.TheydonotnecessarilyrepresenttheviewsoftheInternationalBankforReconstructionandDevelopment/WorldBankanditsaffiliatedorganizations,orthoseoftheExecutiveDirectorsoftheWorldBankorthegovernmentstheyrepresent.PolicyResearchWorkingPaper10462ThispaperestimatestheeffectsofgraduallyintroducingaUS$25/tonCO2-equivalentcarbontaxinSouthAsianeconomiesusingtheClimatePolicyAssessmentTool(CPAT).TheresultsforSouthAsiasuggestthatmone-tizedwelfareco-benefitsnetofefficiencycostsfromsuchatax—regardlessofwhatothereconomiesorregionsdo—areresoundinglypositive,at1.4percentofGDPin2030.Revenuesfromthecarbontaxareestimatedat1.3percentofGDPin2030,whichissubstantialforaregionwithalowtax-to-GDPratio.Oncetheserevenuesarerecy-cled,theKeynesianmultipliereffectthroughincreasedpublicinvestmentandtransferstohouseholdsisassoci-atedwithslightlypositiveneteconomicgrowthrateeffects.Householdincidenceanalysisshowsthatthecarbontaxcanbedesignedasanequity-enhancingpolicy,givennetreductionsintheGinicoefficientforconsumptionfromrevenuerecycling.Thecarbontaxisalsoassociatedwitha2percentweightedaverageinputcostincreaseacrosseco-nomicsectorsin2030.Finally,thepaperdiscussesselectedresultsonandthepoliticaleconomyofacomprehensiveenergypricereformpackage(fossilfuelsubsidyphaseoutandcarbontax),withbroadguidanceonitsimplementa-tion.Overall,thepaperprovidessupportiveevidenceforthegreentransition,showingthatthereneednotbeatrade-offbetweeninclusivegrowthandgoinggreeninSouthAsia..ThispaperisaproductoftheOfficeoftheChiefEconomist,SouthAsiaRegion.ItispartofalargereffortbytheWorldBanktoprovideopenaccesstoitsresearchandmakeacontributiontodevelopmentpolicydiscussionsaroundtheworld.PolicyResearchWorkingPapersarealsopostedontheWebathttp://www.worldbank.org/prwp.Theauthorsmaybecontactedatvmercerblackman@worldbank.org.AreCarbonTaxesGoodforSouthAsia?ValerieMercer-Blackman1LazarMilivojevic2VictorMylonas3Keywords:carbontax,climatechange,decarbonization,energytransition,SouthAsia,fiscalincidence,revenuerecycling,fossilfuelsubsidyreformJELClassification:E62,H22,H23,Q43,Q54_________________________________________________________________________________1/TheWorldBank,email:vmercerblackman@worldbank.org;2/TheWorldBank,email:lmilivojevic@worldbank.org;3/InternationalMonetaryFund(IMF)andTheWorldBank,email:vmylonas@worldbank.org.TheauthorsthankYi(Claire)Liforexcellentresearchassistance,andPaoloAgnolucci(TheWorldBank),DefneGencer(TheWorldBank),DirkHeine(TheWorldBank),JulesHugot(AsianDevelopmentBank),TomMoerenhout(TheWorldBank),IanParry(InternationalMonetaryFund),MargaretTriyana(TheWorldBank),andHansTimmer(TheWorldBank)forhelpfulcomments.Theauthorsalsothankparticipantsat:i)theADBIConferenceontheEnergyMarket,EnergyPricing,andLow-CarbonTransition;ii)theDevelopmentEconomicsProspectsGroup(TheWorldBank)internalseminar;andiii)theSouthAsiaChiefEconomistOfficeinternalseminar(TheWorldBank)forhelpfuldiscussions.ThispaperbuildsonworkinitiatedinthecontextoftheSpring2022SouthAsiaEconomicFocus(WorldBank,2022a).Allremainingerrorsareourown.1TableofContents1.Introduction.......................................................................................................................................................................22.ClimatechangemitigationpoliciesinSouthAsia...............................................................................................42.1HowmuchenergydoesSouthAsiaconsume?............................................................................................42.2SouthAsia’sclimatemitigationcommitments.............................................................................................73.Dataandmethods...........................................................................................................................................................83.1.Simulatingcarbontaximplementation..........................................................................................................83.2Modelingframework...............................................................................................................................................93.3Simulatedscenarios..............................................................................................................................................124.Results...............................................................................................................................................................................134.1Welfareco-benefitsfromaverteddamages...............................................................................................134.2Fiscalrevenues........................................................................................................................................................154.3Economicgrowth...................................................................................................................................................164.4Distributionalimpacts..........................................................................................................................................174.5Comprehensiveenergypricereform.............................................................................................................224.6Sensitivityanalysis.................................................................................................................................................245.Politicaleconomyandimplementationconsiderations................................................................................276.Conclusion.......................................................................................................................................................................31References............................................................................................................................................................................33Appendix1.ClimatemitigationpoliciesandNDCsinSouthAsia.................................................................38Appendix2.Primaryenergyuse,energypricesandemissions......................................................................40Appendix3.Roadmapforenergypricereform.....................................................................................................4221.IntroductionClimatechangeposesasignificantthreattodevelopmentacrossSouthAsia.Appropriateadaptationandmitigationpolicieswillbeessentialtoembracingmoregreenandinclusivegrowthinthefuture.However,investinginresilientinfrastructure,whichiskeytoclimatechangeadaptation,aswellasshiftingtoalow-carbongrowthtrajectory,willrequireconsiderablefinancing.Policymakers,thus,facedifficulttrade-offsamidlimitedresources:raisingfiscalrevenuesisalreadyaperennialchallengeinSouthAsiaasevidencedbyitslowaverageshareoftaxrevenueinGDP(around13percentpre-COVID-19).Moreover,theregion’spercapitacontributiontoglobalgreenhousegas(GHG)emissionsisverylow:in2021,aSouthAsianindividualemitted27percenttheamountofGHGsemittedbyanon-SouthAsian,onaverage.ThismayexplainwhyParisAgreementpledgestoreduceGHGemissionsinSouthAsiatendtobeunambitiousandoftendependentonexternalsupport.Thispaperfocusesonclimatemitigationpolicies,specificallycarbontaxes,andshowsthattheimpactofimplementingsuchpoliciesinSouthAsiacanbeoverwhelminglypositiveforitsdevelopment.Carbontaxesareassociatedwithadditional(andpredictable)fiscalrevenues,whichcanbedeployedtoachievedevelopmentandadaptationtargetswhilereducingtheburdenofdecarbonizationcosts.Buildingonrecentresearchanddata(IMF,2019a;Parry,Black,andVernon,2021),thispaperprovidesevidencethatcarbontaxes,particularlyifcombinedwithaphaseoutoffossilfuelsubsidies,couldbenefitSouthAsiaregardlessofwhatothereconomiesorregionsdo.TheClimatePolicyAssessmentTool(CPAT)isappliedtoestimatetheeffectsofimplementingasetofenergypricereformmeasurescenteredaroundacarbontaxrelativetoabusiness-as-usual(BAU)scenariothatassumeslackofnew(ortighteningofexisting)climatemitigationpolicies.TheresultsindicatethatthegradualintroductionofacarbontaxofUS$25pertonofcarbondioxideequivalent(/tonCO2e)providesmonetizedwelfareco-benefits(reducedmortality/morbidityfromlocalairpollution,aswellasreducedaccidents,congestion,roaddamageandoutputlossesduetoglobalwarming),netofefficiencycosts,equivalentto1.4percentofGDPin2030.Moreover,governmentrevenues-to-GDPwouldrisebyalmost1.3percentagepointsin2030.Wealsoconsiderthreeapproaches(or‘modes’)underwhichtheseadditionalrevenuesareredistributed('recycled’)tohelpensureamoreequalincomedistributionandboostgrowth.Theestimateddistributionaloutcomes(post-‘revenuerecycling’)in2030areprogressive,withtheGinicoefficientfallingbybetween1and5percentdependingontheeconomyandrevenuerecyclingmode.Someeconomicsectorssuffermorethanothers,buttheoveralleffectoninputcostsissmall(aGDP-weightedaverageinputcostincreaseofaround2percent),mostlybecausethesectorsthatseethehighestcostincreasesrepresentaverysmallshareofeconomy-wideoutputintheregion.RealGDPgrowtheffectsaresmallbutpositivein2030.Inaddition,weconsidera‘comprehensiveenergypricereform’(CEPR)packagethatincludesboththeUS$25/tonCO2easwellasthegradualphaseoutofallexistingfossilfuelsubsidies,pricecontrolsandexemptionsby2030.Suchareformwouldleadtonetmonetizedwelfareco-benefitsequivalentto1.4percentofGDP,governmentrevenuegainsof2percentofGDP,slightlyhigher,positiverealGDPgrowtheffects,andevenmoreequalizingincomedistributionoutcomescomparedtojust3implementingthecarbontaxin2030.Tochecksensitivitytointernationalcommoditypriceandcarbontaxrateassumptions,wealsoapplyCPATassuminginternationalenergypricesareloweratthetimeoftheintroductionofthecarbontaxin2024aswellasaCEPRscenariowithacarbontaxrateofUS$12.5/tonCO2e.Finally,wetouchuponwhygovernmentsareoftentimesreluctanttointroducecarbonpricingorphaseoutfossilfuelsubsidiesandprovidesomesuggestionsforthesuccessfulimplementationofareformliketheCEPR.Thisalsolinkstotheinternationaldebateonwhoshouldsharetheburdenofmitigatingclimatechange.Somemightsuggestthatitisunfairtoimposecarbontaxesondevelopingeconomies.Afterall,mostofthememitbutasmallfractionofexistingGHGsintotheatmosphereinpercapitaterms,evenastheyfacethemostseverechallengesfromclimatechange.However,anincreasingbodyofevidence(Hallegatte,2022;Wollburgetal.,2023)showsthattherearevariousdirectbenefitstoadoptingawell-designedgreentransitionstrategytowardoffclimatedamages.Ourpapercontributestothisliterature.Toourknowledge,thisisalsothefirstanalysisthatquantifieseconomicanddistributionalimplicationsofclimatemitigationpoliciesfortheSouthAsiaregionasawhole.Wecontributetotheliteraturebyusingupdatedhouseholdsurveydatafromeconomiesthathavenotbeenconsideredforthistypeofanalysisinthepast.Similarstudieseitherfocusdisproportionatelyonlargeemitters(IMF,2019b;Parry,Mylonas,andVernon,2019;2021)orlackgranularcoverageofSouthAsia(AlonsoandKilpatrick,2022).Ohlendorfetal.(2021)useanorderedProbitmeta-analysisframeworktoexamine53empiricalstudiesin39(mostlyadvanced)economiesandfindthat,inthelesswealthyeconomiesoftheirsample,thelikelihoodofprogressivedistributionaloutcomesfollowingtheintroductionofmitigationpoliciesishigher.Fordevelopingeconomies,theliteratureissparse.AnotablestudyonLatinAmericanandCaribbeaneconomiesfindsthatupto30percentofrevenuesfromcarbontaxesaresufficienttocompensatepoorandvulnerablehouseholdsonaverage,whichmakesthesetaxesquiteeffectivefromthepointofviewofredistribution(Vogt-Shilbetal.,2019).Thispaperisorganizedasfollows.Section2definestheenergytransitionrequirementsinSouthAsia.1Section3describesthedataandmethods.Section4showsthemainresults.Section5discussespoliticaleconomyconsiderations.Section6concludes.1SouthAsiaincludesAfghanistan,BangladeshBhutan,India,Maldives,Nepal,Pakistan,andSriLanka.42.ClimatechangemitigationpoliciesinSouthAsia2.1HowmuchenergydoesSouthAsiaconsume?Mostoftheregion’sGHGemissionscomefromenergy‘use’(eitherinproduction,orintermediateandfinalconsumption).SouthAsiaemits67percentofGHGsfromenergy,primarilyfromtheuseof(carbon-intensive)coalandoil,24percentfromagriculture,andtherestfromothersources(Figure1a).Theshareofemissionsfromenergyislowerthanfortherestoftheworld,wherethisshareis75percent.Commensuratewithitsrelativesize,Indiaemits80percentofSouthAsia’sGHGs(Figure1b).Figure1.SouthAsia:compositionofGHGemissions(excl.LULUCF),20181a.Byeconomyandsector1b.Economyshares(%)inregionalemissionsSource:UnitedNationsFrameworkConventiononClimateChange(UNFCCC).Note:GHGemissionsincludecarbondioxide(CO2),methane(CH4),nitrousoxide(N2O),andF-gases(HFCs,PFCs,SF6,andNF3).LULUCFstandsfor‘LandUse,Land-useChangeandForestry.’TheaverageSouthAsianisnotamajorenergyconsumercomparedtoconsumersinmostotherregions,noramajorCO2emitter,butisnegativelyimpactedbyclimatechange.Asadevelopingregion,SouthAsia’spercapitaenergyintensityislowerthanthatofmanyotherregions.Forexample,Bangladesh,SriLanka,andNepaluselessenergyperpersonthanothereconomieswithsimilarincomelevels(Figure2a).MostGHGemissionsfromenergyusecomefromcoal(63percent,reflectingIndia’semissions),thoughthisnumbervariesacrosseconomies.Bangladeshisalargenaturalgasproducer(andnowimporter),asmorethantwo-thirdsofitsenergyconsumptioncomefromnaturalgas(Figure2b).5Figure2.EnergyintensityinSouthAsiaislow,butasizableportionofenergyusecomesfromcoal2a.World:per-capitaenergyintensity,20182b.SouthAsia:compositionofCO2emissionsbyeconomyandfuel,2018Source:ClimatePolicyAssessmentTool(CPAT)andWorldBankWorldDevelopmentIndicators(WDI).Note:InFigures2aand2b,‘SouthAsia’includesBangladesh,India,Nepal,Pakistan,andSriLanka.Relianceoncarbon-intensivefossilfuelssuchascoalisrelatedtoenvironmentaldamages,withlocalairpollutionbeingoneofthekeynegativesideeffectsoffossilfuelcombustioninSouthAsia(WorldBank,2022b).Subsidizedroadfuelscanworsencongestion,roaddamage,andaccidents,duetohigherdrivingrates.Moreover,theburningoffossilfuelscontributestoclimatechange.Fromaneconomicpointofview,itisoptimaltoaccountforallthese‘negativeexternalities’intheuserpricesoffossilfuels,equatingmarginalprivateandsocialcosts.FollowingParry,Black,andVernon(2021),Figure3showswhatthe2020sociallyoptimal(or‘efficient’)priceofdifferentfossilfuelswouldbeinselectedSouthAsianeconomies.Thesociallyoptimalpriceofeachunitoffueliscomposedofi)supplycosts;2ii)globalclimateandlocal(outdoor)airpollutiondamagesaswellastransport-relatedexternalities;3andiii)astandardvalue-added/generalconsumptiontax.42Fornon-tradeablefossilfuels,theseconsistoftotalproductioncosts.Fortradeablefossilfuels,theseequaltheopportunitycostofhomeconsumption(asopposedtosaleabroad),whichisquantifiedviatheimport-exportparityprice(basedonwhetheraneconomyisanetimporterorexporterofthefuel)andadjustedforhomemargins.3Thecalculationsassumeasocialcostofcarbon(SCC)ofUS$75/tonofCO2.PertheReportoftheHigh-LevelCommissiononCarbonPrices,estimateswerethattheSCCshouldbesomewherebetweenUS$50andUS$100in2030(Stiglitzetal.,2017).Figure3usesthemidpointofthesetwoestimates(discountedto2020),applyinganannualdiscountfactorofapproximately4percent.4SeeParry,Black,andVernon(2021)fordetailedexplanationsofthesecomponents.6Figure3.SouthAsia:retailvs.optimalunitpricesbyeconomyandfuel,2020Source:Authors’estimatesbasedondataandmethodsinParry,BlackandVernon(2021).Afghanistanisnotshown,duetolackofavailabledata.Currently,retailpricesinmostSouthAsianeconomiesarefarbelowtheseoptimalprices,inmanycasesnotevencoveringsupplycostsbecauseofdirectsubsidies.Inotherwords,governmentsaresettingdomesticfossilfuelpricesbelowinternationalreferenceprices.EspeciallyinIndia,Bangladesh,andSriLanka,naturalgasandcoalpricesareconsiderablybelowtheiroptimallevels,whileNepal’sprices(especiallyLPGandkerosene)aregenerallyclosertotheselevels(WorldBank,2022a).Asaresult,raisingretailpricestoachievethisefficientpricewillrequirebothreducingtheexplicitsubsidySupplyCostLocalpollutionCongestionAccidentsRoaddamageVATGlobalwarmingRetailprice0.00.51.01.52.02.5BangladeshBhutanIndiaMaldivesNepalPakistanSriLankaUS$/liter3d.Diesel0.00.51.01.52.02.5BangladeshBhutanIndiaMaldivesNepalPakistanSriLankaUS$/liter3c.Gasoline051015BangladeshBhutanIndiaMaldivesNepalPakistanSriLankaUS$/kilojoule3a.Naturalgas0510152025BangladeshBhutanIndiaMaldivesNepalPakistanSriLankaUS$/kilojoule3b.Coal0.00.20.40.60.81.01.2BangladeshBhutanIndiaMaldivesNepalPakistanSriLankaUS$/liter3e.LPG0.00.20.40.60.81.01.21.4BangladeshBhutanIndiaMaldivesNepalPakistanSriLankaUS$/liter3f.Kerosene7component,andimposingadirectpricetagoncarbon-equivalentGHGemissions(i.e.,acarbontax).5Thiswillallowforgradualsubstitutionacrossenergytypesandprovideanincentiveforproducerstotransitiontolow-carbontechnologies.2.2SouthAsia’sclimatemitigationcommitmentsAllSouthAsianeconomieshavecommittedtoreducingGHGsasspecifiedintheirNationallyDeterminedContributions(NDCs)towardsclimatemitigationannouncedinthe26thUnitedNationsClimateChangeConferenceoftheParties(COP26).Table1summarizestheNDCsoftheeconomiesintheregionthathavespecifiedmitigationpledges.6Appendix1providesdetailsonthepledgesunderCOP26,andpoliciesundertakensofar.EachoftheseNDCscomeswithasetofproposedactions,detailedintheofficialUNFCCCNDCRegistry.7Table1.SouthAsia:NDCsandNDC-consistentcarbontaxesbyeconomy,2030Source:UNFCCC(https://di.unfccc.int/time_series),andauthors'estimatesusingCPAT.Note:NationallyDeterminedContributions(NDCs)areassumedtobeunconditionalonexternalfinancing,exceptforAfghanistan.‘2030NDC-consistentcarbontax’assumesagradualintroductionofthecarbontaxrate(inequalincrements)between2024and2030,aswellasabsenceofconsumer/producerfossilfuelsubsidyorpricecontrolphaseouts.IfNDCsareassumedconditionalonexternalfinancingthe‘2030NDC-consistentcarbontax’wouldbeequalto36.9US$/tonCO2eforBangladeshand40.2US$/tonCO2eforSriLanka,respectively.InternationalDevelopmentAssociation(IDA)countriesaremorelikelytobeeligibleforgrantstofinancemitigationand/oradaptation.BhutanandMaldivesborrowonsmalleconomyterms.Bangladeshborrowsonblendcreditterms.Asof2022,SriLankahasbeenreclassifiedasanIDAcountry,toallowforconcessionalfinancing.MIC=middle-incomecountryundertheWorldBank'scountryincomeandlendinggroupclassification.LULUCF=LandUse,Land-useChangeandForestry.CO2e=carbondioxideemissions-equivalent;BAU=Business-As-Usual;NDCs=(voluntary)NDCsforCOP26,atmostconsistentwith2.5-3degreesCelsiuswarmingabovepre-industriallevels.5SeeParry,BlackandVernon(2021)foradefinitionofexplicitsubsidies.6Bhutanisalreadyanetnegativecarbonemitter,Maldivescontributesaminisculeamounttoglobalwarming,andAfghanistanfacesmajorfragilityandconflict-relatedchallengesthatimpedeplayinganactiveroleintheParisAgreement.SeealsoJha(2021)forasuccinctanalysisoftheParisAgreementpledgesofSouthAsianeconomies.7See:https://unfccc.int/NDCREG.Afghanistan13.6percentreductioninemissionsagainstthebaseline(conditionalonexternalfinancing).50.0NoIDABangladeshLimitof381.85mtCO2eincludingLULUCF.0.0YesIDABhutanRemaincarbonneutral.UnquantifiableNDCn.a.IDAIndia45percentreductioninemissionsintensityofGDP.0.0YesMICMaldivesLimitof2.43mtCO2eby2030excludingLULUCF.8.5NoIDANepalReducefossilfueldependencyby50percentviavariousrenewables/sectoraltargets.UnquantifiableNDCn.a.IDAPakistanLimitof1362.55mtCO2eincludingLULUCF.0.0YesIDASriLanka4percentreductioninemissions(14.5percentconditionalonexternalfinancing)againstthebaseline.23.7NoIDAEconomyNDCdescription2030NDC-consistentcarbontax(US$/tonCO2e)NDCachievableinBAU?Incomegroup8UsingtheClimatePolicyAssessmentTool(CPAT),weestimatetherequiredlevelofthecarbontaxforeacheconomytoreachitsNDCin2030.8UnderthepoliciesimplicitinthelatestNDCs,mostSouthAsianeconomieswilleasilyreachtheirParistargets(i.e.,therequiredlevelofthecarbontaxisessentiallyzeroorquitelow).However,thiscouldalsoreflectrelativelackofambitionintheseeconomies’mitigationpledges.9Asofend-2022,noSouthAsianeconomyhadadoptedpuremarket-basedcarbonpricingschemes,includingEmissionsTradingSystems(ETSs)andfeebates.India’sspecialtaxoncoalistheclosesttoadirectcarbonpriceintheregion.Pakistan’sgovernmentisconsideringsomeformofmonitoring.Afewemergingmarkets(Argentina,Colombia,Chile,Mexico,andSouthAfrica)haveexperimentedwithmoderatecarbontaxes(lessthanUS$10/tonCO2easof2019;WorldBank2022c).Inouranalysiswewillassumethecarbontaxisintroduceddomestically,coveringallsectors/fuels(i.e.,power,industry,transport,residential/buildings–seealsoSection3below).RefertoPryoretal.(2023)foramoredetaileddiscussionoftheseissues.3.Dataandmethods3.1.SimulatingcarbontaximplementationThemostefficientwaytoreduceGHGemissionsisthroughacomprehensiveadoptionofcarbontaxes(Nordhaus,2015).Acarbontaxisaper-unitchargeonthecarboncontent(emissionsperunitofuse)offossilfuels.Carbontaxes,unlikeregulations,incentivizebusinessesandindividualstoswitchtogreenerfuelconsumptionoptions.ThisisalsotrueforETSs.However,ETSsaregenerallylimitedtothepowersectorandlargeindustry10andrequiresignificantadministrativecapacitytomonitorcompliance(Table2).8Thiscalculationimplicitlyassumesthattheonlynewpolicyappliedisaneconomy-widecarbontax.Inthissense,thecalculationisillustrativeandaimstogaugetheamountofmitigation‘effort’thatSouthAsianeconomies’NDCswouldrequire.TheNDCscould,however,bemetviaacombinationofmeasuresincludinggreeninvestmentsandtheprovisionofresearchanddevelopment(R&D)subsidiesfortherenewablessector,etc.Thiscalculationonlyfocusesonfossil-fuelCO2emissions(e.g.,excludingmethaneandLULUCFemissions).9Takentogether,economy-specificParispledgesareatmostconsistentwithwarmingof2.5-3degreesCelsius(whichisnotinlinewiththeoverarchinggoaloftheParisAgreementtolimitwarmingtobelow2-1.5degreesCelsius(seealsodiscussioninParry,Mylonas,andVernon,2021).10However,someETSs(e.g.,Germany)applymidstreamto,forexample,buildings/transportfuels,withtheEUETSbeingexpectedtocoverthesesectorsasofyear2027.See:https://www.europarl.europa.eu/news/it/press-room/20221212IPR64527/climate-change-deal-on-a-more-ambitious-emissions-trading-system-ets.9Table2.Acarbontaxispreferablecomparedtoalternativemitigationapproachesintermsofitsbreadth,easeofimplementationandmarketefficiencyimplicationsSource:Authors’adaptationforSouthAsiabasedonIMF(2019a;2019b).Note:()=Abordercarbonadjustmentcouldbepartofabroadercarbontaxsystem.Colorschemereferstothedesirabilityofeachfeature:green=yes,yellow=maybe,red=no.‘Regulations’includepolicieslikerequirementsforrenewablegenerationshares,whicharetypicallylessefficientthanfeebates.3.2ModelingframeworkWeemploytheClimatePolicyAssessmentTool(CPAT).11CPATisatooldevelopedjointlybytheIMFandWorldBank,allowingforsimulationsofclimatemitigationpoliciesforover175countriesunderuser-specifiedscenarios.Themodelprovidesestimatesandcountry-specificprojectionsoffossilfuelCO2emissionsandassessmentsoftheenvironmental,fiscal,economic,publichealth,otherexternalityanddistributionalimpactsofcarbontaxesandfossilfuelsubsidyreform,amongotherpolicies.Themodeldecomposesfossilfuelandother(e.g.,renewables,electricity,biomass)energyuseintothepower,industrial,transport,andresidentialsectors,projectingitforwardby:i)GDPforecasts;ii)assumptionsabouttheincomeandown-priceelasticityofdemandforfuels;iii)assumptionsabouttherateoftechnologicalchangeaffectingenergyefficiency;andiv)changesininternationalenergyprices,withpre-existingfueltaxesandleviesbeingheldconstantinrealterms.Theimpactsofmitigationpoliciesonfueluseandemissionsdependoni)theireffectonfutureenergyprices;ii)fuelswitchingwithinthepowergenerationsector;andiii)priceelasticitiesofelectricityandotherfueldemandacrosssectors.Thetoolisparameterizedusingfueluseandemissionsfactorsbycountry-sectorfromtheInternationalEnergyAgency(IEA,2021).Dataonenergytaxes,energysubsidiesandpricesbyproduct11CPATisforthcomingandwillbeavailableforpublicuseat:https://www.worldbank.org/en/topic/climatechangeandhttps://www.imf.org/en/Topics/climate-change/CPATFeatureofalternativemitigationapproachesCarbonTax()EmissionsTradingSystemsFeebatesRegulationsPotentialforexploitingmitigationopportunitiesFull,ifappliedcomprehensivelyFull,ifappliedcomprehensively(inpracticeoftenlimitedtopower/largeindustry)SimilartoregulationsCanexploitsomekeyopportunitiesbutnotall(forexample,reductionsinvehicleuse)Useofprice/marketmechanismYesYes,butpriceonlypredictableifpricefloorsorsimilarmechanismsincludedYesNoEfficiencyandincentiveforinnovationfrommitigationresponsesinducedbypolicyYes,peopleandfirmschoosemostefficientwayofreducingemissionsYes,peopleandfirmschoosemostefficientwayofreducingemissionsYes,firmschoosemostefficientapproachNoautomaticmechanism,butcanavoidenergypriceincreasesPricepredictabilityYes(ifclearlyspecifiedtrajectory)No(unlessincludespricefloorsorsimilarmechanisms)Yes(ifclearlyspecifiedtrajectory)No(implicitpricesvarywithtechnologycosts,energyprices,etc)RevenuegenerationandadministrativeburdenYes,andeasytobuildintoexistingfuelorroyaltytaxsystemsMaybe(ifallowancesauctioned,butrevenuebasemaybelimitedinSouthAsia)No,sincebestdesignisrevenueneutral,butnewadministrativecapacitytoapplyfees/rebatestopowergenerationNo,thoughcapacityneededtoenforceregulations10andcountryisobtainedfromtheIMF.12PricesareprojectedforwardusingthisdataintandemwithanaverageofIMFWorldEconomicOutlook(WEO)andWorldBankCommodityMarketsOutlook(CMO)forecastsofinternationalenergyprices.Fuelpriceresponsivenessisbroadlyconsistentwithstandardempiricalandenergymodelparametersandresults.RefertoBlacketal.(forthcoming)formoredetailsonmodelparametrizationanddatasources.13TheanalysiswithinCPATissubjecttosomelimitationsandcaveats.First,themodeldoesnotexplicitlyincorporategradualturnoverofenergycapital.Thisassumptionoverstatestheshort-termresponsivenessoffuelusetocarbonpricingbutisreasonable,giventhefocusonmedium-termscenariosimulations(by2030inourcase–seeSection3.3below).Second,CPATabstractsfromthepossibilityofadditionalmitigationactions(beyondthoseimplicitincurrentcountry-levelpricedata)undertheBusiness-As-Usual(BAU).Specifically,theBAUscenarioisusedasa‘benchmark’againstwhichtheperformanceofanymodeledmitigationinstrumentsismeasured(astandardapproachintheliterature).Intuitively,theBAUscenarioassumesabsenceofnew(ortighteningofexisting)climatemitigationpolicies.Third,thefuelpriceresponseparametersinthemodelareplausibleformarginalpricechanges.Inotherwords,modelelasticitiesmaynotapplyunderdrasticpricehikesthatcouldcausemajortechnologicaldevelopmentsornon-linearadoptionoftechnologies.Fourth,themodelassumesflat(perfectlyelastic)supplycurves,absenceofgeneralequilibriumeffects,andnochangesininternationalfuelpricesthatmightresultfrommultiplecountriesintroducingmitigationpoliciesatthesametime.14Theincidenceonhouseholdconsumptiondecilesd={1,2,3,4,5,6,7,8,9,10}fromhigherretailpricesfollowingtheintroductionofaclimatemitigationpolicyiscalculatedas:(A)∑𝜋𝜋𝑡𝑡𝑑𝑑𝑑𝑑∙𝜌𝜌𝑡𝑡𝑑𝑑𝑑𝑑𝑔𝑔wheregstandsforthemaincategoriesofgoods/servicesconsumedbyhouseholdsineachdecile,𝜋𝜋𝑡𝑡𝑑𝑑𝑑𝑑istheshareofdeciled’stotalconsumptionspentongood/servicegattimet,and𝜌𝜌𝑡𝑡𝑑𝑑𝑑𝑑istherelativepriceincreaseforgood/servicegcausedbytheclimatemitigationpolicy.Forexample,foragoodwithabudgetshareof2percentoftotalhouseholdconsumption,expression(A)impliesthata5percentincreaseinsaidgood’spricewillreducedeciled’sconsumptionby0.1percentagepoints.WeperformdistributionalanalysiswithinCPATforfiveSouthAsianeconomies(Bangladesh,India,Nepal,Pakistan,andSriLanka)usingdataonhouseholdbudgetsharesobtainedfromthefollowingHouseholdBudgetSurveys(HBSs):i)2016-2017HouseholdIncomeandExpenditureSurvey(HIES)12See,forexample:https://www.imf.org/en/Topics/climate-change/energy-subsidies.13DetaileddocumentationontheCPATmethodologyisavailablehere:https://cpmodel.github.io/cpat_public/14Thoughparameterizationisbroadlyconsistentwiththemodelingliterature,which(tovaryingdegrees)incorporatesthesefactors.SeefurtherdiscussionoftheseissuesinIMF(2019b),Parry,Mylonas,andVernon(2021)aswellasBlacketal.(forthcoming).11forBangladesh;15ii)2018ConsumerPyramidsHouseholdSurvey(CMIE)forIndia;16iii)2010-2011LivingStandardsSurvey(LSS)forNepal;17iv)2018-2019HouseholdIntegratedEconomicSurvey(HIES)forPakistan;18andv)2016HouseholdIncomeandExpenditureSurvey(HIES)forSriLanka.19Afterthedataisaggregatedintoeight(8)energyandfourteen(14)non-energy,CPAT-compatiblegood/servicecategories,20householdsaregroupedintopopulation-weighted,per-capitaconsumptiondeciles,andbudgetsharesarecomputedbydividingtotalconsumptionexpenditureoneachCPATgood/servicecategorybyeachhousehold’stotalconsumptionexpenditureacrossallgoods/services.Sector-specificpercentpriceincreasesfromthesimulatedcarbontaxareobtaineddirectlyfromCPATforeachfossilfuel(TableA.2).Thefossilfuel-specificpricechangesandbudgetsharescanbeusedtoestimatethelossinconsumptionfrompriceincreasesoffossilfuels(e.g.,electricity,gasoline,diesel,naturalgas,etc.)followingtheintroductionofacarbontax(thatis,the‘direct’incidenceeffect).Priceincreasesforotherconsumergoods(duetohigherenergyandfossilfuelinputpricesforeachsector)arecalculatedassumingfullpassthroughofproducercostincreasesontoconsumerpricesdomestically(thatis,perfectlyelasticsupplycurves).21Non-fuelsectorpriceincreasesareobtainedasthesum-productof:i)eachsector’sfossilfuelintensity;andii)thepriceincreaseofeachfossilfuelinducedbytheclimatemitigationpolicy.Sectoralfossilfuelintensitiesareobtainedfromdirectrequirementsmatricesofinput-outputtables.ThesetablesaresourcedfromtheGTAP-10database,22whichincludes2014datafor65sectors23thatare,inturn,mappedtotheCPATnon-fuelconsumptiongood/servicecategoriesmentionedabovetorecomputeequation(A).Summingtheestimatesacrossallnon-fuelgoodsandservicesyieldsameasureofthelossinconsumptionfrompriceincreasesofnon-fossilfuelproducts(forexample,food,clothing,housing,etc.)followingtheintroductionofacarbontax(thatis,the‘indirect’incidenceeffect).Addingupthedirectandindirecteffectsyieldsanestimateofthetotalincidenceeffect.Wefurtheradjustthetotalincidenceeffectdownwardsto15See:http://data.bbs.gov.bd/index.php/catalog/18216See:https://consumerpyramidsdx.cmie.com/17See:https://microdata.worldbank.org/index.php/catalog/100018See:https://www.pbs.gov.pk/content/household-integrated-economic-survey-hies-2018-1919See:http://www.statistics.gov.lk/IncomeAndExpenditure/StaticalInformation20Tofacilitaterelativecross-countrycomparabilityofresults,CPATusesastandardizedclassificationofgoodsandservicesacrossallcountries,distinguishingamongeight(8)fuel(coal,electricity,naturalgas,oil,gasoline,diesel,kerosene,LPG)andfourteen(14)non-fuel(appliances,chemicals,clothing,communications,education,food,healthservices,housing,other,paper,pharmaceuticals,recreationandtourism,transportationequipment,publictransportation)good/servicecategories.Thisclassificationis,inpart,informedbytheimplicitcarbonintensityofnon-fuelgoods/services(i.e.,goods/serviceswithsimilarcarbonintensitiesareclassifiedunderthesamecategory).21ThisassumptionislessrealisticforEmissionsIntensiveTradeExposed(EITE)industriescompetinginworldmarketswithlimitedabilitytopasscostincreasesforwardtofinalconsumers.22See:https://www.gtap.agecon.purdue.edu/databases/v10/index.aspx.GiventhattheGTAP-10input-outputtablesarerelativelyoutdated,theyarescaledsuchthattheirimplicitrevenueflowsfromahypotheticalclimatemitigationpolicymatchthoseofCPAT(whichareprimarilybasedonIEA(2021)data).23Thesecoverthefollowingfivefossilfuels:coal(‘coa’),electricity(‘ely’),oil(‘oil’),naturalgas(‘gas’,‘gdt’)andpetroleumproducts(‘p_c’).12accountforhouseholdbehavioralresponsestohigherconsumerprices.243.3SimulatedscenariosWeuseCPATtosimulatetheimpactsofaneconomy-widecarbontaxthat,from2024onwards,graduallyincreasestoreachUS$25/tonofCO2ein2030,inreal2021UnitedStatesdollars(US$).This(moderate)US$25/tonCO2ecarbontaxisassumedtoapplyupstreamtoallsectorsandfuelsandinadditiontoanypre-existingtaxesorsubsidies.Itisalsoconsideredasareasonablepricefloorandyardstickforlow-incomedevelopingeconomies(Chateauetal.,2022).Underthismainscenario,wefocusentirelyonthecarbontaxeffects,assumingthatfossilfuelsubsidies,pricecontrolsandexemptionsarephasedoutinboththeBAUandcarbontaxscenarios.InSection4.5,weconsidera‘comprehensiveenergypricereform’(CEPR)package,whichevaluatestheaggregateimpactofboth:i)thegradualintroductionoftheUS$25/tonCO2ecarbontaxby2030;andii)thegradual(butcomplete)phaseoutoffossilfuelsubsidiesandrelatedpricecontrolsandexemptions(assumed,inthiscase,tonottakeplaceintheBAU).Theuse(or‘recycling’)ofrevenuesfromclimatemitigationpoliciesforcompensationwillbeakeycomponentofsuchpoliciesbecauseitcansignificantlyenhancethetransitionbyboostingbuy-infromthepopulation.Thechoiceofwhattodowiththerevenueproceedsiscontextspecific.Insomeeconomies,theoptimalstrategymaybetoallocatetheserevenuestowardsgeneralfiscaladjustment.InthecaseofSouthAsia,themoneycouldbeusedtostrengthensocialsafetynetsystemsorforadaptation(e.g.,betterinsuranceagainstweather-relateddisastersinruralareas,orgreaterrenewableenergyproduction,includingvianewenergyinfrastructure).Tworevenuerecycling‘modes’aresimulatedunderboththeUS$25/tonCO2ecarbontaxandCEPRinthispaper:(a)targetedcashtransferstohouseholdsinthebottom70percentoftheconsumptiondistribution;25and(b)publicinvestmentintheformofinfrastructureaccessprovision(e.g.,tosupportSustainableDevelopmentGoals,SDGs),basedonhouseholdaccesstothefollowinginfrastructuretypes:electricity,water,sanitation,InformationandCommunicationsTechnology(ICT),andpublictransport.2624Allincidenceeffectsareadjusteddownwardsusingdecile-consumptionitem-specificpriceelasticitiesofdemand(assumingaconstantelasticityofsubstitutionhouseholdutilityfunction)fromtheUnitedStatesDepartmentofAgriculture(USDA).See:https://www.ers.usda.gov/data-products/commodity-and-food-elasticities/.25Thisrevenuerecycling‘mode’maynotbeasefficient(e.g.,relativetocuttingdistortionarytaxesonlabor),butmayberequiredtoguaranteecrucialsupportforreformfrommostofthepopulation(particularlythemiddleclass).SeealsoSection5below.26Household-levelaccesstotheinfrastructuretypesmentionedaboveisalsoobtaineddirectlyfromHBSs.Theassociatedrevenuerecycling‘mode’issetupasfollows:if,forexample,theaverageinfrastructureaccessrateofthepoorest(e.g.,bottom10percent)individualsisequalto30percent,climatemitigationpolicyrevenuesareallocatedtotheremaining70percentoftheseindividualsandsoonforsubsequentsegmentsofthepopulation.Thegainsfrom13InSection4below,unlessotherwisestated,wesimulateanadditionalrevenuerecyclingmodeasanequalsplitofrevenuesbetweenmodes(a)and(b)above,namely:(c)50percentofrevenuesrecycledtowardstargetedcashtransferstothebottom70percent,and50percenttoenhancinghouseholdinfrastructureaccess.Forthemodelingofdifferentmodesofrevenuerecycling,thetotalamountofrevenues(adjustedbytheproportionchosentoberecycled)isusedasaproxyforthegross(monetary)householdgainfromrevenuerecycling.Forthemodelingofnew,targetedcashtransfers,recycledrevenuesweredividedbythepopulationofthetargeteddeciles(e.g.,firstsevendecilesfortargetingofthebottom70percentofthedistribution,assumingnoleakageorunder-coverage)and,subsequently,expressedinpercentofdecile-specifichouseholdper-capitaconsumption.Thedistributionalanalysisdescribedaboveissubjecttoseveralshortcomings.First,inprojectingthedistributionalanalysisforwardto2030,thefossilfuelintensities(asyieldedbytheinput-outputmatrices)anddecile-specifichouseholdbudgetsharesareassumedtoremainconstantintheBAU.Thismeansthattheuseofinput-outputmatriceslikelyoverstatesconsumerpricechangesfornon-fuelgoodsandservices,sincethefossilfuelintensityofproductionwoulddecreaseduetohigherenergypricesandenergyefficiencyimprovementsasthecapitalstockturnsover.Second,someoftheincidenceofclimatemitigationpoliciescouldbepassedbackwardsintolowerproducerprices,assumingupward-slopingsupplycurvesinthemedium-to-longrun.Someoftheincidencecouldbebornebycapitalowners(improvingprogressivity)orevenworkers(worseningprogressivity).SeealsoadditionalcommentaryinParry,Mylonas,andVernon(2019)andShang(2023).4.ResultsWeexamineeffects27oftheUS$25/tonCO2ecarbontaxalongdifferentdimensions:netmonetizedwelfareco-benefits(Section4.1);fiscalrevenues(Section4.2);realGDPgrowth(Section4.3);anddistributionalimplicationsacrossindustriesandhouseholds(Section4.4).Wealsopresentselectedresultsforthe‘comprehensiveenergypricereform’(CEPR)package(Section4.5)andconsidersensitivityoftheseresults(Section4.6).4.1Welfareco-benefitsfromaverteddamagesTheintroductionoftheUS$25/tonCO2ecarbontaxisassociatedwithGHGemissionsreductionsofover20percentbelowBAUinSouthAsia(FigureA.1).Likewise,netwelfareco-benefitsfromcarbonrevenuerecyclingunderthisspecific‘mode’are,hence,relativelyunderstated,sincetheydonotaccountforthelikelypositiveefficiencygainsfrompublicinvestment(i.e.,assumingprojectshavebenefitsgreaterthantheircostsasopposedtothezeroefficiencygainsfromdirectcashtransferpayments).27ThesearepresentedforindividualSouthAsianeconomies.ResultsfortheentireSouthAsiaregionarecalculatedasthe2030,applicablepolicyscenario(carbontax,fossilfuelsubsidyphaseoutorCEPR)GDP-weightedaveragesoftheeconomy-specificresultsshownineachfigureortablebelow.14taxationaresignificant,at1.4percentofGDPin2030(Figure4).Thesearecalculatedasthedifferencebetweengrosswelfareco-benefitsandefficiencycosts.Theefficiencycostsmeasurethedeadweightlosses/Harberger’strianglesfromtheimpositionofthecarbontax,plusthelossinconsumersurplusfromhigherfossilfuelpricesasinParry,Mylonas,andVernon(2021).Grosswelfareco-benefitsconsistofthefollowing:i)climatebenefits(theglobalwarmingbenefitsfromreducedemissionsduetofossilfueltaxation);ii)airpollutionco-benefits(avertedlocalairpollutionmortalityandmorbidity);28aswellasiii)transportco-benefits(avertedroadaccidents,reducedroaddamageandreducedcongestion).TheprocessofreducingGHGemissionswillentailhouseholdsrespondingtoanincentiveofgraduallymovingtowardscleanersourcesofenergytosavemoney,usingpublictransportation.Forexample,therewillbegreaterincentivestobuildmorepedestrianwalkwaysandprovideflexibleworkarrangementsforthosewhocanworkfromhome.Thiswillcreatesignificantsavingsintermsofaverteddeathsfromaccidents,willlessenexposuretoPM2.5(mostlyinurbanareas),29reducerequiredspendingonroadrepair,andleadtolesscongestionwithfewerpassengervehiclesontheroad—so-calledtransportco-benefits—particularlyinIndia(wheretheserepresentaround0.3percentofGDPin2030).Theremayalsobegreaterdemandforwalkablegreenspacesinurbanareas,andlowertrafficwillreducetimespentcommuting.Outdoorairpollutionwillalsodecline,reducingaveragesickdaysperworker,aswellasincreasinglifeexpectancyandtheabilityoftheaverageSouthAsiantocontributetheirfullhumancapitaltotheeconomy.Figure4.Netwelfareco-benefits(%GDP)fromUS$25carbontax/tonCO2ebyeconomy,2030Source:Authors’estimatesusingCPAT,basedondataandmethodsinOECD(2012),Parryetal.(2014)andParryandSmall(2005).28InCPAT,thewelfareco-benefitsfromreducedlocalairpollutionaremonetizedbyusingValuesofStatisticalLife(VSLs)basedonOECD(2012).Forgonewageincomefrommorbidityisalsoincludedbutdoesnotrepresentalargeportionofthetotalhealth-relatedco-benefits.SeealsofurtherdiscussioninBlacketal.(forthcoming).29Nine(9)outoftheworld’s10citieswiththeworstairpollutionareinSouthAsia.SouthAsiansareexposedtoextremelyunhealthylevelsofambientairpollution:nearly60percentofthepopulationlivesindenselypopulatedareas,whereconcentrationsofPM2.5exceedbymanytimesthelevelrecommendedbytheWorldHealthOrganization(WorldBank,2022b).15Globalclimatebenefitsaresocialbenefitsfromemissionsreductionsfollowingimpositionofthecarbontax(valuedatasocialcostofcarbonofUS$47pertonofCO2ein2019,risingatapproximatelya4percentannualratetoreachroughly$75pertonCO2ein2030,30allinreal2021US$terms).Sincethemeasuredbenefitaccruesglobally—thoughitcorrespondstotheSouthAsiancontributiontoreduceGHGemissions—itisrepresentedasthepatternedcomponentinFigure4.Thewelfareco-benefitsincorporatetheideathatpeople’sabilitytobemoreproductivewillincreaseamidlowerlevelsofcarbonemissions,whilehealthcostsfromillnesseswillfall.WorldBank(2021a)estimatesthatthelossofhumancapitalperpersoninSouthAsiasolelyattributabletoairpollutionin2018was1.4percent,significantlyhigherthaninotherregions(Figure5).Figure5.TherelativelossofhumancapitalperpersonduetoprematuredeathsattributabletoairpollutionisalmostfivetimeshigherinSouthAsiacomparedtotheglobalaverageSource:WorldBank(2021a).Note:Datareferstotheyear2018.4.2FiscalrevenuesThesimulatedcarbontaxraisesGDP-weightedaveragefiscalrevenuesfortheregionofapproximately1.3percentofGDPin2030(Figure6.a),providingfundsforcompensatingthosenegativelyaffectedorforeasingthegreentransition.31Theserevenuesareindependentofthemonetizedwelfareco-benefitsshowninFigure4.Thefuelsourceoftheserevenues(Figure6.b)isstronglycorrelatedwiththemaintaxbaseandcarbonintensityoffossilfuelconsumptionineacheconomy,forexample,coalinIndiaandnaturalgasinBangladeshandPakistan(TableA.3).30ThisvalueisconsistentwiththemidpointestimateinStiglitzetal.(2017),whichisalsousedinParry,Black,andVernon(2021)(seeFigure3).31Theseestimatesarenetoftaxbaseerosion(broadening)frompre-existingtaxes(subsidies),andaccountforgradualbaseerosionovertimefollowingtheintroductionofthecarbontax.16Figure6.FiscalrevenuegainsfromaUS$25/tonCO2ecarbontaxby2030aresubstantial6a.Revenuesbyeconomy,20306b.Revenuesbyfuelsourceandyear,SouthAsiaSource:Authors’estimatesusingCPAT.Note:Showsadditional(aboveBAU)fiscalrevenuesfromthepolicynetofrenewableenergysubsidies.LULUCFforBhutaninfluencesrevenuelevels,soitsmarginalabatementforagivenUS$ofthecarbontaxisverysmall.Becauseacarbontaxcorrectsanexternality,itssuccessismeasured,notbyitsbuoyancy,butinitsabilitytomoveconsumptionawayfromcarbon-intensivefuels,implyingthatthetaxbaseshouldshrinkovertime.Thisisreflectedintheresults.Figure6.b.showsthatrevenueriseseveryyearbutatadecreasingrateasthetaxbaseerodes,eventhoughthecarbontaxrateisassumedtoincreaseinequalannualincrementsto2030.Moreover,asthecarbontaxcorrectsfortheexternality,italsopartiallyoffsetstheeffectofanypre-existingfossilfuelsubsidiesoncarbon-intensivefuels(theretailpricerisesabovethesupplycostsandsalestaxshowninFigure3).4.3EconomicgrowthRevenuerecyclingapproachesmatterfortheoverallgrowtheffectsoftheUS$25/tonCO2ecarbontax.Thesizeofthemultipliersassociatedwithdifferentpolicymeasuresdeterminestheimpactofacarbontaxoneconomicactivity.Themultipliers’valuescomefromCPAT’sestimatesforlow-andmiddle-incomecountriesaspertheWorldBank’sMacro-FiscalModel(MFMod).32Assuminghalfoftherevenuesareredistributedascashandhalfasinfrastructureinvestment(revenuerecyclingmode(c)asdescribedinSection3.3),theresultsshowalmostneutraleffectsonrealGDPgrowthrates.33AssumingthecarbontaxisslowlyphasedintoreachUS$25/tonCO2eby2030,realannualGDPgrowthratescouldseeaninitialdownwardtrend(comparedtoBAU),asefficiencycostsfromthecarbontaxweighonproduction.However,revenuerecyclingintheformofmorefundsforpublicinvestmentandaboosttoconsumptionfromcashtransferswouldalmostoffsetthesenegativeeffects(Figure7).AfghanistanandNepalwouldseethelargestpositiveneteffectsfromrevenuerecycling.32SeeSchoder(2022)andBlacketal.(forthcoming)formoredetails.33Ifrevenuesarerecycledentirelyintoinfrastructureinvestment(cashtransfers),thegrowtheffectsarelarger(smaller).17Figure7.Carbontaxationisnotexpectedtodiminishtheregion’srealGDPgrowthrate7a.EffectsonGDPgrowthbyyear,SouthAsia7b.EffectsonGDPgrowthbyeconomy,2030Source:Authors’estimatesusingCPAT.Note:FigureshowsestimateddeviationsfromprojectedrealGDPgrowthratesrelativetoBAUfortheUS$25/tonCO2ecarbontax,assumingrevenuerecyclingviamode(c)asdescribedinSection3.3.4.4Distributionalimpacts4.4.1IncidenceacrosshouseholdsBroadlyspeaking,ourresultssuggestthatincomedistributionimprovesmoderatelywiththeintroductionofacarbontax.Figure8showsthepercentchangeintheconsumption-basedGinicoefficientfromtheUS$25/tonCO2ecarbontax,withtheleft-mostsetofbarsshowingasmallbutpositiveeffectontheincomedistributionforthreeSouthAsianeconomies:Bangladesh,Nepal,andPakistan.Hence,evenwithoutaccountingforrevenuerecycling,incomeequalityimprovesasmallamountinsomeeconomiesrelativetoBAU.3434Thisisthecasenotleastbecausepoorerhouseholdsintheregionarelargelydisconnectedfromtheelectricitygrid.Theyalsoconsumeasignificantamountofbiomass(thepriceofbiomassisnotaffectedunderthesimulatedcarbontax).However,thiseffectcouldattenuateasincomesgrowandpoorerhouseholdsbecomemorefossil-fuel-intenseintheirconsumption(seefurtherdiscussioninParry,Mylonas,andVernon,2019).18Figure8.Percentchangeinconsumption-basedGinicoefficientfromUS$25/tonCO2ecarbontaxrelativetoBAUbyeconomyandrevenuerecyclingmode,2030Source:Authors’estimatesusingCPAT.Note:Figureshowsthepercentdeviationinthehouseholdconsumption-basedGinicoefficientforeacheconomyfollowingtheintroductionofaUS$25/tonCO2ecarbontaxrelativetoBAU.Thesetofbarsunder‘Pre-recycling’showspercentdeviationsassumingnocarbontaxrevenuesarerecycledtohouseholds.Subsequentbarsshowpercentdeviationsassumingcarbontaxrevenuesarefullyrecycledviamodes(a),(b),and(c)asdescribedinSection3.3.RevenuerecyclingsignificantlyenhancesincomeequalityrelativetoBAU.Specifically,thethreeright-mostbarclustersinFigure8showimprovementintheGinicoefficientunderdifferentrevenuerecyclingmodes.IndiaandPakistanwouldseeanimportantimprovementinequalityfromsuchpolicies-almost4-5percentdeclineintheGini,onaverage,overlessthanadecade.SincetheUS$25/tonCO2ecarbontaxdirectlyimpactsthepricesofdifferentenergysources,ourresultsshowthatitsincidencewillbelargerforhouseholdsthatconsumerelativelymorecarbon-intensivefuels(Figure9).35InSouthAsia,theincidenceofcarbontaxationturnsouttobeprogressive.Inotherwords,theshareoftaxrevenuesraisedisrelativelyhigherforwealthierSouthAsiansbecausepoorerhouseholds’shareofeffectivecarbonconsumptionislower.Moredetailedresultsonthedistributionalimpactsofcarbontaxationandrevenuerecyclingapproachesdependonhouseholdspendingpatterns.TheindividualeconomychartsinFigure9assumecarbontaxrevenuesarerecycledviamode(c)asdescribedinSection3.3.Absentrevenuerecycling,consumptionlossesfromtheintroductionofthecarbontaxare(mildly)progressivelydistributedacrossdeciles,mirroringthefindingsobservedintermsoftheGinicoefficientinFigure835Inmanyadvancedeconomies,acarbontaxwouldhurtthepoorestincomedecile(s)ofthepopulationmorethanthewealthiest,giventhehighershareoffossilfuelsintheirconsumptionbaskets(seealsoArietal.,2022andArreguietal.,2022).Forexample,intheUnitedStates,lackofaccesstopublictransportationformostpeoplemeansthatavehicleisanessentialgood,particularlyforruralandsemi-rurallow-incomepopulations.EarlierestimatesfortheUnitedStatesshowthatthewealthiestquintileswouldbelessaffectedthanthepoorestquintilesfromaUS$50/tonCO2ecarbontax(IMF,2019b).19above.36Onaverage,approximately40percentoftheincidenceisduetoincreasesinthedirectcostofenergyforhouseholds(thatis,the‘direct’effect),whiletherestisduetoanincreaseinthepricesofnon-fuelgoods/servicesthatuse(thenowcostlier)fossilfuelsasaninputintotheirproductionprocess(the‘indirect’effect).Oncerevenuerecyclingisconsidered,thebottomsevenconsumptiondecilesreceivenetgainsranging,onaverage,betweenapproximately4percent(Bangladesh)and11percent(Nepal)oftotalhouseholdconsumption.37Figure9.In2030,thedirectvs.indirecthouseholdconsumptionlossesfromtheUS$25/tonCO2ecarbontaxinselectedSouthAsianeconomiesrepresentasmallportionoftotalhouseholdconsumptionandaremildlyprogressivelydistributedSource:Authors’estimatesusingCPAT.Note:IndividualeconomychartspresentthetotalincidenceeffectsfromaUS$25/tonCO2ecarbontaxin2030by(population-weighted)per-capitahouseholdconsumptiondecile,assuming36Meanincidenceeffects(pre-revenuerecycling)acrossallconsumptiondecilesrangebetween0.6(Nepal)and2.9(India)percentoftotalhouseholdconsumption.37Thisisbydesign,giventhatthetargetedcashtransferisassumedtoapplyonlytothebottom70percentoftheconsumptiondistribution.20revenuesarerecycledviamode(c)asdescribedinSection3.3.Allreportedvaluesarepopulation-weightedaveragesandadjustedforbehavioralresponsestohigherconsumerprices(seealsoSection3.2).4.4.2IncidenceacrosseconomicsectorsAseconomicactivitytransitions,thereisacorrespondingtransitionintheproductionstructure,withfossilfuel-intensivesectorslosingandenergy-efficientorrenewable-intensivesectorsgaining.Thismaydirectlyimpactfirmsandworkerstotheextentthatfirmsseecostincreases—givenmoreexpensiveafter-taxenergyinputs.Toquantifythesecostincreasesfornon-fossilfuel/electricitysectors,weassumeawayfullpassthroughofproducercostincreasesontoconsumerprices(i.e.,producersbearthefullincidenceofthecarbontax38)andusethesameinput-outputdataandmethodsoutlinedunderSection3.2above.TheimpactsoftheUS$25/tonCO2ecarbontaxonindustryinputcostsaremoderate,exceptforafewsectorsinafeweconomies(Figure10).Whilethesectorswiththehighestcostincreasesin2030varybySouthAsianeconomy,thegeneralpatternisthatthelargestsectors-intermsoftheirshareintotaloutput-aretheleastlikelytoexperiencesubstantialcostincreases.Cementandaviationseethehighestaveragecostincreasesin2030(aviationislinkedtotourismwhichisanimportantexportingsectorforthesmallereconomiessuchasMaldivesandNepal).Inparticular,thelargestcostincreasesareseeninIndia,ataround11to12percent(iron/steelandcement),givenitsheavyuseofcoal.PakistanandNepalalsoseerelativelylargecostincreasesinthesesectors(ataround2-4percent),whileeconomicsectorsinBangladesh,Bhutan,Maldives,andSriLankaexperiencenegligiblecostincreasesoverall.Infact,the2030averageeffectiveinputcostincreaseforSouthAsia,weightedbytheshareofthesectorsinregionaloutput(andeacheconomy’sshareinregionalGDP),wouldonlybearound2percentrelativetoBAU.38AsdiscussedunderSection3.2above,thisassumptionisparticularlyrelevantforEITE(orheavyindustry)sectorscompetinginworldmarkets(andnotbeingabletopasshigherpricesforwardtohouseholds),sincethesesectorsareafocalpointofinternationalcompetitiveness(aswellascarbonleakage)-relatedconcernssurrounding(andpotentiallyimpeding)theadoptionofclimatemitigationpolicies(Dolphinetal.,2020).21Figure10.PercentinputcostincreasesbyeconomyandsectorfromtheUS$25/tonCO2ecarbontax,2030Inputcostincrease(percent)(LHS)Sector'sshareintotaloutput(percent)(RHS)05101520253035400246810121410a.SouthAsia05101520253035400246810121410b.Afghanistan05101520253035400246810121410c.Bangladesh05101520253035400246810121410d.Bhutan05101520253035400246810121410e.India05101520253035400246810121410f.Maldives05101520253035400246810121410g.Nepal22Source:Authors’estimatesusingCPATandGTAP-10data(seealsoSection3.2).4.5ComprehensiveenergypricereformThepreviousresultslooksolelyattheeffectsofacarbontax.However,Figure3makesitevidentthattoachievetheoptimalpriceforallfuels,governmentswillneedtoremovebothexplicitandimplicitsubsidies(thelatterachievedmostlythroughtheintroductionofthecarbontax).Itwoulddefeatthepurposeofrationalizingpricesifgovernmentsintroducedacarbontax,ontheonehand,whilespendingonfossilfuelsubsidiesontheother.Onlythecompleteremovaloffossilfuelsubsidieswouldprovideclearpricesignals,giventheirdistortionarynature.We,therefore,showa‘comprehensiveenergypricereform’(CEPR)scenario,underwhichallfossilfuelsubsidies,pricecontrolsandexemptionsaregraduallyphasedoutalongwiththeintroductionoftheUS$25/tonCO2ecarbontaxby2030.Section5belowdiscusseshowtoovercomesomepolicyimplementationchallenges.Intermsofnetmonetizedwelfareco-benefits,theresultsforSouthAsiaofimplementingtheCEPRarestillresoundinglypositive(Figure11.a).Thelargerportionofthesenetwelfareco-benefitscomesfromthecarbontax,withjustphasingoutfossilfuelsubsidiescominginatanon-negligible0.31percentofGDPin2030.Thewelfareco-benefits(netofefficiencycosts)oftheCEPRamountto1.4percentofGDPin2030.39IntermsofgovernmentrevenuegainsfromtheCEPRpackage,SouthAsiacouldreceiveanadditional2.0percentagepointsofGDPonaverage,splitaboutequallybetweenthecarbontaxrevenuesandtheforgoneexpenditureonsubsidies(Figure11.b).However,thereareimportantdifferencesincompositionacrosseconomies.InthecaseofNepal,whichdoesnothaveexplicit,directfossilfuelsubsidies,most(ifnotall)oftherevenuewouldcomefromthecarbontax.InthecaseofBhutan,whichdependsonsubsidiesonLPGfromIndiabutconsumesverylittlecarbon,therevenuewouldindirectlycomefromthefossilfuelsubsidyphaseout.40TheMaldivesandPakistan(bothofwhichareconsidering39Inotherwords,similartothenetwelfarebenefitsoftheUS$25/tonCO2ecarbontaxin2030(Figure4).Thisisbecausethecombinedintroductionofacarbontaxandphaseoutoffossilfuelsubsidies,pricecontrolsandexemptionsundertheCEPRdisproportionatelyincreasesefficiencycosts(e.g.,duetolargerconsumersurpluslossesfromlowerfossilfuelconsumption).However,saidefficiencycostincreasesaremorethancompensatedbythepositivegrosswelfareco-benefitstoyieldapositivenetbenefitestimateunderthisscenarioaswell.40BhutanimportsLPGfromIndiaatsubsidizedprices.RemovingtheLPGsubsidywouldthusaccruetotheIndian(asopposedtotheBhutanese)government.05101520253035400246810121410h.Pakistan05101520253035400246810121410i.SriLanka23areductioninfossilfuelsubsidies),aswellasSriLanka,seesignificantrevenuejustbyphasingoutfossilfuelsubsidiesby2030.Figure11.NetmonetizedwelfarebenefitsandgovernmentrevenuesfromtheCEPR,203011a.SouthAsianetwelfarebenefits11b.GovernmentrevenuesbyeconomySource:Authors’estimatesusingCPAT.SeeFigure4forthecalculationofnetmonetizedwelfareco-benefits.WealsoexaminetheimpactsoftheCEPRontheconsumption-basedGinicoefficient,post-revenuerecycling(Figure12).Assumingthatrevenuesarerecycledaspermode(c)(seeSection3.3),weobservethat:i)theseimpactsarelargerthantheonesestimatedsolelyforthecarbontax(giventheavailabilityofmorerevenuesforrecyclingpurposes);andii)theimpactisroughlysplit30-70betweenthephaseoutoffossilfuelsubsidiesandthecarbontax,exceptforNepalwhichdoesnotcurrentlygrantfossilfuelsubsidies.Figure12.Percentchangeinconsumption-basedGinicoefficientfromtheCEPRrelativetoBAUbyeconomy,2030Source:Authors’estimatesusingCPAT.Note:Figureshowsthepercentdeviationinthehouseholdconsumption-basedGinicoefficientundertheCEPRrelativetoBAU.Deviationsintheconsumption-basedGinicoefficientarecalculatedassumingallrevenuesarerecycledundermode(c)asdescribedinSection3.3.244.6SensitivityanalysisWeconsiderseveralchangesinthemainparametersofthemodeltoevaluatetherobustnessofourconclusions.414.6.1EnergypriceassumptionsCrudeoilandothersubstitutessuchascoalandnaturalgashaveseenincreasinglyhigherpricelevelsandvolatilityinrecentyears.Specifically,theaverageannualpriceofenergycommodities(oil,naturalgas,andcoal)reacheditshighestleveleverinrealtermsin2022(WorldBank,2023).ThepriceofBrentcrudeoilaveragedUS$100/barrel(bbl)in2022andisexpectedtoremainhighaccordingtoIMFandWorldBankforecastsusedintheCPATmodel(Table3).ThisisalreadyasubstantialburdenonSouthAsiaintermsofrisingimportcostsandtheimplicationsforinflationthroughthepassthroughofimportedfoodandfuelpricechanges.Ifjusttoimproveenergysecurityandreducefiscalvulnerabilityasbudgetsgrapplewithoilpriceuncertainty,reducingtheconsumptionoffossilfuelswouldprovideawelcomebenefittoSouthAsia.Toillustratethispoint,weapplytheCPATmodelassumingtheinitialoilpricein2023isatalowerbound(thelevelinQ22020)ofUS$35/barrel(‘”LowPrice”Scenario’sectionofTable3).Wethen,applythesameannualchangesforfutureyearsasthoseinthepolicyscenarioabovetoproduceanewhypotheticalenergypricepathto2030.Otherfossilfuelpricesfollowthesamepathtoo(seelastfiverowsofTable3).WecomparethispathtothepathassumedintheCEPR(actualforecast),withthe2022initialyearshowingrecord-highprices(firstfiverowsofTable3).Thegapbetweenthesetwoforecastedpricepathsrepresentstherangeoffossilfuelpricesthatcouldbereachedoverthenext10years,andthusaconfidencebandforhowsensitivethemodelistoassumptionsaboutglobalfossilfuelprices.Table3.GlobalfossilfuelpriceassumptionsSource:Authors’estimatesusingCPAT.Note:TheforecastedpricepathintheCEPRisanaverageofWorldBankCommodityMarketsOutlook(October2022):www.worldbank.org/commodities;andIMFWEO(October2022):https://www.imf.org/en/Research/commodity-pricesdata.41Inthesensitivityanalysis,weonlyexaminethefiveeconomiesforwhichweconductthedistributionalanalysis(seeSection4.4above)."ComprehensiveEnergyPriceReform"Scenario20232024202520262027202820292030CrudeOil$/bblnom87.078.576.374.673.272.172.172.1Coal$/tonnom278.0232.9229.1228.5228.4228.6228.6228.6NaturalGas-LNG$/MMBtunom26.723.621.719.919.719.519.519.5NaturalGas-NorthAmerica$/MMBtunom4.85.05.15.15.25.25.25.2NaturalGas-Europe$/MMBtunom18.718.216.114.113.613.613.613.6"LowPrice"Scenario20232024202520262027202820292030CrudeOil$/bblnom26.8324.2323.5423.0122.5822.2622.2622.26Coal$/tonnom43.2736.2535.6635.5635.5535.5735.5735.57NaturalGas-LNG$/MMBtunom7.066.235.725.265.205.155.155.15NaturalGas-NorthAmerica$/MMBtunom1.261.301.331.331.341.361.361.36NaturalGas-Europe$/MMBtunom1.211.181.040.920.880.880.880.8825TheresultsareshowninTable4.Inthis‘LowPrice’specification,thepathofthecarbontaxphase-inisthesameasunderourmainpolicyscenarioofUS$25/tonCO2eby2030,butlowerenergycostsraiseindustryenergydemand,andthushelptheeconomygrowfaster.RealprivateconsumptionisalsohigherinthefirstfewyearsundertheBAUandCEPRscenarios(alsofueledbyhigherenergydemand).Giventhattheregionisanetenergyimporter,thecostofimportsislower.Consumptionwould,hence,bemoreresponsivetoprice-basedclimatemitigationpolicy(eitherintheformofcarbontaxesorfossilfuelsubsidyphaseouts),implyingalargerreductioninGHGemissionsunderthelow-fossilfuelpricescenario.ComparedtotheCEPRpackage,lowerenergypricesleadtoamuchfastertransition(seethethirdrowofTable4foreveryeconomy).Fiscalrevenues-to-GDPin2030are,thus,about10percentagepointshigherforNepalandPakistan.Thenetmonetizedwelfareco-benefitsaresignificantlylarger:morethantwiceaslargeasintheCEPRscenarioabove(India,Pakistan,SriLanka).However,GDPisalmostthesamecomparedtotheCEPRscenario(exceptforSriLanka,whereitishigher).Furthermore,exceptforIndia(post-revenuerecycling),theGinicoefficientfallsfasterformosteconomies(bothpre-aswellaspost-revenuerecycling),meaningthattheincomedistributionbecomesmoreequalasaresultofthepolicywheninitialenergypricesarelower.Table4.Sensitivityanalysisofselectedimpactsrelativetocomprehensiveenergypricereform(CEPR)byeconomyandassumption,2030Source:Authors’estimatesbasedonCPAT.Notes:Unlessotherwisestated,theTableshowscomparisonsrelativetoCEPR(=100)(firstrowforeveryeconomy).Deviationsintheconsumption-basedGinicoefficientarecalculatedassumingallrevenuesarerecycledviamode(c)asdescribedinSection3.3.The‘lowenergyprices’rowsassumepricesin2024remainattheirlowestlevelthisdecade,namely,theirvalueinthesecondquarterof2020.4.6.2LowercarbontaxrateassumptionAsshowninTable1,thelevelofthecarbontaxconsistentwiththestatedNDCpledgesvariessubstantially,fromoverUS$23/tonCO2einSriLankatoUS$0/tonCO2einBangladesh,India,andPakistan.We,therefore,estimatetheresultsassumingthecarbontaxrateishalfaslargeasunderourmainpolicyscenario,atUS$12.50/tonCO2e.AsbrieflydiscussedinSection2.2above,thisisslightlyEconomyScenarioImpactRevenuesNetwelfareco-benefitsRealGDPGinicoefficientdecline(pre-recycling)Ginicoefficientdecline(post-recycling)Comprehensiveenergypricereform(CEPR),baselineenergypriceforecast100.0100.0100.0100.0100.0CEPR,US$12.50carbontax75.275.2101.985.871.0CEPR,lowenergyprices(lowerbound)102.8128.6101.8111.4107.1Comprehensiveenergypricereform(CEPR),baselineenergypriceforecast100.0100.0100.0100.0100.0CEPR,US$12.50carbontax83.993.3102.798.254.4CEPR,lowenergyprices(lowerbound)98.6188.5102.7246.275.5Comprehensiveenergypricereform(CEPR),baselineenergypriceforecast100.0100.0100.0100.0100.0CEPR,US$12.50carbontax78.673.198.049.952.2CEPR,lowenergyprices(lowerbound)109.2143.398.9172.9111.9Comprehensiveenergypricereform(CEPR),baselineenergypriceforecast100.0100.0100.0100.0100.0CEPR,US$12.50carbontax75.375.095.986.974.4CEPR,lowenergyprices(lowerbound)108.7178.495.9131.7120.4Comprehensiveenergypricereform(CEPR),baselineenergypriceforecast100.0100.0100.0100.0100.0CEPR,US$12.50carbontax65.461.9137.486.372.4CEPR,lowenergyprices(lowerbound)106.6181.1137.3171.9117.6BangladeshIndiaNepalPakistanSriLanka26higherthantherateintroducedinsomeemergingmarketsanddevelopingeconomies(EMDEs;WorldBank,2022c).Thisscenarioillustratesaverygradualphase-inofthetaxandwouldonlybebeneficialif,forexample,economiesareabletoaccessanewtechnologyintheouteryearsthatwould,atthesametime,significantlylowercostsfrominactionintheearlyyears(innetpresentvalueterms).42Still,risksfromwaitingtointroducecarbonpricingreformmaybequiteseriousduetothresholdeffects.43ThesecondrowforeacheconomyinTable4showstheresultsofphasingoutfossilfuelsubsidies,pricecontrolsandexemptionsand,contemporaneously,introducingaUS$12.50carbontax.Formosteconomies,therevenuesareonlyabout75-80percentofwhattheywouldhavebeenundertheCEPR,thoughthebenefitsofahighercarbontaxalsoincreasebeyond2030(Table4onlyreportsvaluesin2030).Additionally,monetizedwelfareco-benefitsaremorethanthree-quartersthevalueoftheCEPRpackage,inlargepartbecausemitigationactioninIndiahasanimportantimpactonresultsfortheregion.ItisworthnotingthattheGDPestimatein2030underthisscenarioisaboutthesameasintheCEPRscenarioformosteconomies,exceptforSriLanka(wheretheUS$12.50/tonCO2ecarbontaxyieldsa37percenthigherGDPcomparedtotheoriginalCEPRscenario).Comparingtheoutcomesforincomedistribution,inequalityfallsbutbymuchless(about70-80percentcomparedtotheCEPRscenario).Thisistruepre-andpost-recyclingofrevenues(lasttwocolumnsofTable4).BecauseNepaldoesnothavefossilfuelsubsidies,inequalityimprovesbyonlyaroundhalfcomparedtotheCEPRscenario.Insum,alowerassumedcarbontaxrateslowstheenergytransition,and,thus,entailslessfavorabledistributionalimpacts.Incontrast,lowerassumedenergypricesbetween2023and2030leadtohighergovernmentrevenues,agreateramountofredistributionand,thus,alargerimprovementinthepost-recyclingGinicomparedtotheBAUandtheCEPR(Figure13).ThislastsensitivityscenarioalsohelpsexplainwhyhighglobalfossilfuelpricesaredetrimentaltoSouthAsianeconomies:theyadverselyimpacteconomies’termsoftrade(astheregionisanetenergyimporter),reducingrealincomesasaresult.42Thatsaid,SouthAsianeconomiesarealreadyembracinginnovativeprogramslikebatteryexchangesinIndia,off-gridsolarelectrificationintheruralareasofBangladesh,andfloatingsolarpanelsacrosstheregion.43See:https://news.un.org/en/story/2021/09/109999227Figure13.Percentchangeinconsumption-basedGinicoefficientrelativetoBAUbyeconomyandsensitivityanalysisassumption,2030Source:Authors’estimatesusingCPAT.Note:Figureshowspercentdeviationsinthehouseholdconsumption-basedGinicoefficientrelativetoBAUforeacheconomyfollowingrecyclingofrevenuesundermode(c)(seeSection3.3)forthreecases:i)aUS$25/tonCO2eundertheCEPR;ii)aUS$12.50/tonCO2eundertheCEPR,andiii)theCEPRunderpointi)butusingthelower-boundglobalenergypriceforecastspresentedinTable3(see‘”LowPrice”Scenario’section).5.PoliticaleconomyandimplementationconsiderationsTherearecountlesscasesofattemptstoreducefossilfuelsubsidiesindevelopingcountries,manyofwhichhavebeenmetwithbacklashagainsttherulinggovernment.Thereareevenfewerinitiativestointroducecarbontaxes.Thisis,inlargepart,becausethereisamisconceptionthatfossilfuelsubsidyphaseoutisasimpleeliminationofabudgetlinefromonedaytothenext.Often,suchreformsareimplementedwhenthegovernmentisunderpressuretoreduceitsfiscaldeficit,andremovaloffossilfuelsubsidiesoccursasalastresortmeasureunderanausterityprogram(e.g.,SriLankaandPakistaninlate2022;WorldBank2022d).Therefore,politicalsupportcouldbeveryweakinthesecases.Incontrast,thecomprehensiveenergypricereform(CEPR)packageillustratedinthispapermustbewell-plannedatalllevelsofgovernment,andgraduallyphasedintoenablehouseholdsandfirmstoadjusttothenewrelativeprices.44Thelessonslearnedfromthesuccessfulphaseoutoffossilfuelsubsidiesareexactlythosethatshouldbeappliedwhenintroducingacarbontax:thetaxneedstobepartofabroaderpolicypackagewhichincludesredistributiontovulnerablehouseholds,infrastructure44Thegradualnatureofthepackageensuresthatthereareno‘strandedassets’anddoesnotrequireenergyproducersorenergy-intensiveindustriestodoanythingdifferent.AswithanETS,theincentiveisforthefirmstograduallyfindfewerpollutingtechnologiesastheyseefittoproducetheirgoodsandservices,butunlikeanETS,monitoringandcoordinationrequirementsbythegovernmentareminimal.28investments,andemploymentcompensationandretrainingforthosemostaffected,suchasworkersinacoal-miningcommunity.45ThedistributionalanalysisinSection4.4aboveconsideredthecaseofcashtransfersbenefittingawidesegmentofthepopulation(70percent),notjustthepoor.Thereasonisthatitmaybecounterproductivetoshiftallrevenuestothepoorestquintile,asthesupportofthemiddleclasscouldbecritical.Broad-basedandadequatecompensationmethodsarenecessary:ifbenefitsarediffuse,itcanbemuchhardertoidentifyandmanagethepoliticalcoalitionneededforreforms(Clementsetal.2013;InchausteandVictor,2017).Moreover,itcanminimizethepublicdiscontentofafewwhichcouldverywellleadtothereversalofreforms(Moerenhout,2017).Specifically,underrevenuerecycling‘mode’(a)inFigures8and9,proportionalredistributionofclimatemitigationpolicyrevenuestothepoorest70percentofhouseholdsmayhelpincreasereformacceptability.Ofcourse,thebroadercoverageshouldbere-assessedovertheyears,giventhelimitedfiscalresourcesandthe50-50sharebetweencashtransfersandinfrastructureinvestment(‘mode’(c))iscontext-specific:othereconomieswithamoreurgentneedforbasicinfrastructure,includingforadaptation,mayprefertoshiftmoreintopublicinvestment.46Mosteconomiesintheregionhavesomeformoffossilfuelsubsidy,thoughtheyhavebeenslowlymovingawayfromsuchsubsidiestowardsbetter-targetedcashtransfersoutofnecessity,giventightpost-pandemicfiscalspace(seeWorldBank,2022a,Table1.1).Still,explicitfossilfuelsubsidiesin2021averaged0.8percentofGDPinSouthAsia,varyingwidely(frominsignificantamountsinNepal,to2.5percentofGDPinPakistan-seeFigure14).Whatismore,universalpricesubsidiesforfossilfuelsaretypicallyuntargetedandbenefitwealthyhouseholdsinabsoluteterms,whichisassociatedwithweakredistributiveoutcomes(seeClementsetal.,2013;Abdallahetal.,2015;Coadyetal.,2015).45RecentempiricalworkbyHilleetal.(forthcoming)explorestheemploymenteffectsofvariouspoliciessuchasafossilfuelsubsidyphaseout.Theyfindthatthenetemploymenteffectsaresmallbutpositive.However,havingtheex-anteknowledgeofthesequantitativeeffectscanfacilitatecompensatoryactionsforworkers.Vagliasindi(2013)alsodiscussesin-depthexperiencesinvariouscountries,includingIndia,ineliminatingfossilfuelsubsidies.46SouthAsiaishighlyexposedtoclimate-relatedextremeevents.AccordingtotheGlobalClimateRiskIndexandtheIMFClimateChangeDashboard,mosteconomiesintheregionarerankedasthemostclimate-vulnerableglobally(Germanwatch,2021).Thefrequencyandseverityofclimateimpactshaveintensifiedandareprojectedtoworsen,duetogradualglobalwarming-SouthAsiawillseehotterweather,longermonsoonseasons,andincreaseddroughtsinupcomingdecades(IPCC,2018).29Figure14.SouthAsia:explicitfossilfuelsubsidies(costminusprice)byeconomy,2021Source:Authors’estimatesbasedondataandmethodsinBlack,Parry,andVernon(2021).Toreapthepotentialbenefitsfromcarbontaxation,broadconsensusandintegrationintobudgetplanningarerequiredbecausetheschememustremaininplaceandnotchangefollowingeverypoliticalcycle.47Revenuemobilizationcapacityacrosstheregionislow,withtaxrevenues-to-GDPat13.1percent,onaverage,between2015and2019(WorldBank,2021b).Nonetheless,carbontaxesshouldbegenerallyeasiertocollectwhenappliedupstream,sinceproducersanddistributorsofenergyaremostlylarge,formal,and(sometimes)state-ownedcompanies(IMF,2019a;IMF,2019b).Thephasinginofcarbontaxeswouldideallyoccurwhenglobalcommodity(e.g.,oil)pricesarefallingtosoftenthepricechange.Thoughthecarbontaxandfossilfuelsubsidyphaseoutshouldbepartofthesamecomprehensivepackage(CEPR)asdiscussedinSection4,apositivecarbontaxrateshouldnotbephasedinuntilafterthefossilfuelsubsidyphaseoutiscomplete.Otherwise,thecarbontaxwilllikelycreateapartialanddistortedcorrectiononalreadyprice-distortingsubsidies.Thisisbecausesubsidiesonfossilfuelsareanegativetaxonenergyconsumption(bothrenewableandnon-renewable),whereasthebaseofthecarbontaxistheconsumptionofcarbon,notofenergy.Sincefossilfuelsubsidiesspurimportdemandandhigherenergyconsumption,thiswouldcontributetobalanceofpaymentspressuresinSouthAsia,asitoccurredin2022whenenergypricesrose(WorldBank,2022d).Thiscanunderminethesuccessofthereform’simplementation.Thebestoptionistointroducethecarbontaxatazerorateandincreasetherateoncefossilfuelsubsidiesarefullyeliminated.4847Forexample,India’s2022-2023budget,presentedinFebruary2022,incorporated,forthefirsttime,suchalong-termstrategy.Climateactionwasframedasoneofthepillarsofthebudget,includingplansforlow-carbonandclimate-resilientdevelopment(Jha,2021).48Thelegalandinstitutionalstructureofthereform(fossilfuelsubsidyphaseoutandcarbontax)shouldbesetupatthesametime,asasinglepackageofmeasures.However,theactualspeedofthefossilfuelsubsidyphaseoutandcarbontaxphase-inwillalsodependonenergypricesatthetimeofimplementationasdiscussedinSection4.6.1.Ifenergypricesarefallingorlowatimplementation,reformacceptancebythepublicmaybemorelikely.30Itwillalsobeimportanttoensurethatallfossilfuelsubsidiesandinter-agencyarrearsarefirsteliminatedsothatenergycompaniesarenotmakinglossesforuncompensatedwholesalepriceschemes.Forexample,ifBangladesh’sstate-ownedoilandgascompany(PetroBangla)ispayinghighimportpricesforLNG,sellingatstipulatedsubsidizedprices,andnotbeingcompensatedbythebudgetfortheper-unitsubsidy(aswasthecasein2022),thenitmaychoosetoreducecarbonpricepayments.Inotherwords,theexplicitsubsidycomponentofenergypricingmustbeeliminatedfirst,sothatproducersareabletocovertheiroperatingcosts.Thismeansthattaxadministrationandagreementsacrossgovernmententitiesshouldbetransparent.Onewaytoincreasetransparencyistoexplicitlyprovideestimatesinthebudgetofthecontingentliabilitiesandarrearsacrossgovernmententities,aswellasestimatesoftheforgonefundsduetoinsufficientincometoutilitycompanies.Cashtransfersandinfrastructurefundingshouldbefrontloadedtoincreasepoliticalsupportforthereform.Forexample,cashtransferscouldbeprovidedatthebeginningoftheyearatfixedannualsums.Theamountofcashtransfer(s)wouldbedependentontherevenuecollectedfromthepolicypackage,whichwouldimplyanincreaseinthetransfer(s)perhouseholdeveryyear.Incentivesforswitchingtocleanenergyshouldalsobeofferedearlyintheprocess.Eliminatingfossilfuelsubsidiescouldbepackagedasawell-marketedprogramthatofferssomethingtothepublicthatisequivalenttoorbetterthanwhattheyreceivedintheBAU.Forexample,inadditiontolinkingtherecyclingofrevenues,atargetedandmeans-testedcashtransfersystemcouldbeexpanded,ordiscountvouchersprovidedtopassengerswhouse‘green’publictransport(anelectrictuc-tucfarewouldbelowerthanthefareforafossilfuel-runone).Therewillbestart-upcostsassociatedwithsettingupcashtransferschemesinSouthAsia,asinformalityintheregionishighandnoteveryoneisregisteredortiedtothesocialprotectionsystem(WorldBank,2020).Thiscouldbeanincentive:SouthAsiangovernmentshavebeenintroducinguniquecitizenshipIDsusingbiometrictechnologytodeliverservices,includingsubsidies,andmanysocialsafety-netsystemsexpandedduringthepandemicwiththehelpofdigitaltechnologiesandFinTech(WorldBank,2022d).Increasingcashtransfersatscaleisthebestwaytostrengthenthem,andthusmakethesupportsustainable.Apropercommunicationstrategywouldclearlyexplainthelinkbetweencashtransfersandtheremovaloffossilfuelsubsidiesortheintroductionofacarbontax(Worleyetal.,2018).Someofthemosteffectivefossilfuelsubsidyeliminationschemesaroundtheworld,whicharealwayspoliticallydifficulttoimplement,haveusedeffectivecommunicationapproaches(Ghana,Jordan,Indonesia—seeIMF,2008).Otherinitiallywell-designedprogramsquicklylostpopularsupportbecausetheabsenceofpropercommunicationbythegovernmentleftavoid(soonfilledbydisinformation).NotableexamplesaretheElSalvadornaturalgassubsidyreformin2011(Calvo-Gonzalezetal.,2015)andtherebatesoncarbontaxesinCanadain2020,andSwitzerlandin2008(Mildenbergeretal.,2020).AhighlysuccessfulfossilfuelsubsidyremovalprogramwasIran’s2010reform.Inparticular,thesuccessofthisreformiscreditedlargelytotheexplicitlinkagetocashtransfersaspartofthesamepolicy31package.YousefiandFarajnia(2022)showthatown-priceelasticitiesofenergyusebyenterprises,aswellascross-priceelasticities,increasedafterthereforminIran,suggestingthatfirmsandhouseholdsdidrespondtothenewrelativepricesbyswitchingtoenergy-efficienttechnologies.Ascountriesincorporatethecostsofclimatechangeintotheirmedium-termexpenditureframeworks,forexample,byusingtheCPATmodel,itwillbeeasiertoquantifytheforgonebenefitsoftransitioningtorenewables,includingthroughaprogramliketheCEPRpackage.Forexample,in2022,Nepalincorporatedsuchaccountsinitsmedium-termexpenditureframeworkaspartofthe2021Green,Resilient,andInclusiveDevelopment-StrategicActionPlan(GRID-SAP).Appendix3showsaroadmapofstepsthatcouldbetakentodepoliticizeexplicitfossilfuelsubsidiesandrollinacarbontax.Suchaschemewouldbeinlinewithgoodpublicexpenditurepractices.McCulloch(2023)alsodiscussesindetailsensibleapproachestoreducingfossilfuelsubsidies.6.ConclusionThispaperarguesthatthegradualintroductionofamoderate(US$25/tonCO2e),economy-widecarbontaxisaneffectiveclimatechangemitigationpolicyforSouthAsianeconomiestoadopt.Ifcoupledwithafossilfuelsubsidy,pricecontrolandexemptionphaseout,itwouldincreaserevenuesby2percentofGDPonaveragefortheregionin2030.Iftheseadditionalrevenuesareusedtocompensatehouseholdsandinvestininfrastructure,theywouldleadtoprogressivepolicyoutcomes(asmeasuredbyresultingreductionsintheconsumption-basedGinicoefficient)andcouldcreateincentivesforgreateruseoftheregion’slow-costandabundantrenewableenergy(Bloomberg,2021).Investmentsindecarbonizationcanalsohelplimittheextentoflock-intocarbon-intensiveinvestmentsintheenergysectorastheregiondevelops.Suchareformwouldalsoreducehealth-andtransport-relatedexternalitiesfromfossilfueluse,leadingtomonetizedwelfareco-benefits(netofanyefficiencycosts)equivalentto1.4percentofGDPin2030.Itwould,hence,beinSouthAsia’sinteresttoproceedwiththesortofenergypricereformanalyzedinthispaper,regardlessofwhatotherregionsoreconomiesdo.Mainstreamingclimatechangeintomacro-financialpoliciesthatfostersustainablegrowthwillalsoreducetheregion’sdependenceonimportedfossilfuels.Thetraditionalmacroeconomicobjectivesofpricestability,robustexternalandfiscalbalances,andasustainableeconomicgrowthplanarestillequallyimportant,buttheirdesignshouldreinforcethepathtowardsagreenerdevelopmentmodel.Thefindingsfromthispaperreinforcethenotionthatpricingcarbonisgoodfortheregion’sdevelopmentevenifSouthAsiaisnotamajorglobalGHGemitterinpercapitaterms.Adaptationwillbenecessaryfortheregion,butmitigationcancatalyzesuccessfulgreendevelopment.Althoughmanydevelopingeconomiesarereluctanttounilaterallycommittomitigationtargetsbecausetheseareperceivedasanobstacletotheirdevelopment,theeffectsofclimatechangeandinnovationingreen32technologystandtoalterthistrade-off.SouthAsiadoesnothavetoreduceenergyconsumption—whichisrequiredforeconomicdevelopment—butitcanreducethecarboncontentofsaidenergyconsumptionasittransitionstorenewables.Thepolicydiscussionshouldshifttohow(asopposedtowhether)tofacilitatethetransitiontoagreeneconomywhileminimizingassociatedshort-termcosts.33ReferencesAbdallah,Chadi,DavidCoady,SanjeevGupta,andEmineHanedar.2015.“TheQuestfortheHolyGrail:EfficientandEquitableFiscalConsolidationinIndia.”IMFWorkingPaperNo.15/152,InternationalMonetaryFund,Washington,DC.Alonso,Cristian,andJoeyKilpatrick.2022.“The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sure(conditional):Useenergy-efficientappliancesinhouseholdandcommercialbuildings(achieve19%and25%reductioninemissionrespectively)2022target:ImplementEnergyEfficiencyBuildingCodeonamandatorybasisGHGReductionbyMitigation(2030)fortheHouseholdsSub-sector(combinedunconditionalandconditional):6.3%;GHGReductionbyMitigation(2030)fortheCommercialSub-sector(combinedunconditionalandconditional):.94%;Switchingto100%super-criticalcoalpowergeneration;GHGReductionbyMitigation(2030)forthePowerSub-sector(combinedunconditionalandconditional):48.9%-Reduceenergyintensity(perGDP)by20%by2030comparedto2013levels(E&CCMasterPlan);Reduceitsdependencyonfossilfuelsby50%.-GHGReductionbyMitigation(2030)fortheEnergySector(combinedunconditionalandconditional):96.1%-5%ofenergyfromrenewablesourcesby2015,and10%by2020(2008RenewableEnergyPolicy);-175GWby2022:renewables:-80%electrificationthroughrenewableenergysourceshavingappropriateenergymixby2050-Increasetheshareofrenewableenergyfromtheexisting50%,to60%in2020;-1000MWofutility-scalesolarpowerplant-10GWby2022biofuels;-By2020,increasetheshareofrenewablesinenergymixby20%anddiversifyingitsenergyconsumptionpatterntomoreindustrialandcommercialsectors.-Establishmentof105MWofbiomasspowerplants;-400MWofwindgeneratingcapacityby2030-100GWhydro;-Develop130,000householdbiogassystems-Establishmentof176MWofminihydropowerplants-100GWby2022solar;-Develop1,000institutionalbiogasplants-Establishmentof115MWofsolarpowerplants-Develop200communitybiogasplants-60GWby2022wind-Additional220MWofelectricityfrombio-energyby2030-Increasetheshareofbiogasupto10%asenergyforcookinginruralareas;-DevelopMiniandMicroHydroPowertoreach15MW-Improve4000watermills-Developaelectrical(hydro-powered)railnetworkby2040tosupportmasstransportationofgoodsandpubliccommuting.-4,000MWofhydroelectricityby2020and12,000MWby2030-Additional50MWofelectricityfromsmallandmicrohydropowerplants;-Develop1,500institutionalsolarpowersystems(solarPVandsolarpumpingsystems)-2,100MWofsolarenergyby2030witharrangementstodistributeitthroughthegrid-By2030,ensure15%ofthetotalenergydemandissuppliedfromcleanenergysources.-By2030,expandcleanenergygenerationfromapproximately1,400MWto15,000MW,ofwhich5-10%willbegeneratedfromminiandmicro-hydropower,solar,windandbio-energy.-70%marketshareofimprovedbiomasscookstoves,reaching20millionhouseholdsin2030;-Increasetheshareofbiogasupto10%asenergyforcookinginruralareas-40%marketshareofimprovedgascookstoves;10%marketswitchfrombiomasstoLPGforcookingcomparedtothebusinessasusual-Improve475,000cookingstoves-Morethan1.5millionImprovedCookStoves(ICS)-Equipeveryhouseholdsinruralareaswithsmokeless(improved)cookingstoves(ICS)by2030-14-47%emissionreductionthroughBanningFixedChimneykiln(FCK),encourageadvancedtechnologyandnon-firedbrickuse-GHGReductionbyMitigation(2030)fortheBrickKilnsSub-sector(combinedunconditionalandconditional):12.47%-2026target:Conversionofexisting600MWoffueloil-basedcombinedcyclepowerplantstoNG-2027target:EstablishmentofnewcombinedcyclepowerplantsinplaceofanticipatedcoalpowercapacityadditionsintheBAUandgasturbineswithapproximately700MWofcapacitiestobeoperatedfromNGRenewableenergyAtleast20%REgenerationby2025andatleast60%by2030;AREPolicy(2019):Thepolicysetsthespecifictargetofatleast20%REgenerationby2025andatleast30%by2030-Establishmentoflarge-scalewindpowerplantsof514MWCleancooking&heatingGas&gasflaringGHGReductionbyMitigation(2030)fortheFugitiveSub-sector(combinedunconditionalandconditional):4.78%EnergyefficiencyIncreaseenergyefficiencywithcombinedsectoraltargetstoachieveatotalof1.5%annualimprovementinenergyefficiency;Increaseenergyefficiencywithcombinedsectoraltargetstoachieveatotalof1.5%annualimprovementinenergyefficiency2030target:Transmissionanddistributionnetworkefficiencyimprovements(Lossreductionof0.5%comparedwithBAUby2030)asanunconditionalmeasure(Target:Approximately1,848GWhenergysavings)GeneralenergyOffset22.4MtCO2eperyearby2025throughexportofReducetheGHGemissionsagainstBusiness-As-Usual(BAU)scenarioby20%(approximately36,010.2Gg)inenergysector.39Progressonclimatechangemitigationisatanearlystageforthefourlargesteconomiesintheregion.•Bangladeshhashaddisorderlyurbanizationwhichthreatensitsdevelopmentobjectives.AmongthereasonswhyDhakaisconsideredsounlivableaccordingtolivabilityindicesareitstraffic,congestion,andurbanpollution.Whilesomeoftheseproblemsneedtoberesolvedthroughactiveinstitution-buildingandurbanpolicies,incentivestotheprivatesectorandthosedealingwithday-to-daycommutecanalsohelp.Withthisinmind,thecountry’spledgestowardsmitigationarequiteimpressive.•IndiaisthethirdlargesteconomyintermsofoverallGHGemissionsintheworld(thoughmuchlessinpercapitaterms).Assuch,itwillbeimportanttoexamineitsNDC.IndiamadeaneagerlyawaitedannouncementofnewclimateactiontargetsattheCOP26summitinGlasgow.Thisincluded:i)installingnon-fossilfuelelectricitycapacityof500GWby2030;ii)sourcing50percentofenergyrequirementsfromrenewablesby2030;iii)reducing1billiontonsofprojectedemissionsby2030;iv)achievingcarbonintensityreductionof45percentover2005levelsby2030;andv)achievingnet-zeroemissionsby2070.Indiaisalsotheworld’sfifthlargestsolarphotovoltaicmarketwithalmost50GWoftotalinstalledcapacityandhastheworld’scheapestsolarresources.Itsroadmapwillbuilduponthissuccesswithcountry-specificstrategiestoacceleratethedecarbonizationofelectricitythroughinvestmentinhydropower,solar,andwindenergyproduction,withtheaimofincreasingaffordability,reliability,andefficiencyandreducingenergyimports.•PakistanhasanambitiouscumulativeGHGemissionsreductiontargetof50percentbelowtheirprojected2030levelunderaBAUscenario,withanunconditionalreductionof15percentfinancedfromthecountry’sownresourcesandaconditionalreductionof35percentsubjecttotheprovisionofinternationalgrantfinancethatwouldrequireanestimatedUS$101billionjustforenergytransition(GoP,2021).ThisisasubstantialupgraderelativetoPakistan’s2016NDC.Pakistanalsojoinedtheglobalpledgetocutmethaneemissions,launchedatCOP26.•SriLankahaspledgedtoimproveenergyefficiencystandardsattheconsumptionlevelandisontargettohave15percentofitstotalenergydemandsuppliedfromcleanenergysources,including5to10percentofthatgeneratedfrommini-andmicro-hydropower,solar,windandbioenergy.Atthetimeofwriting,SriLanka’seconomywasindebtdistress,soexpandingnewprogramswillbeachallenge.Othereconomiesintheregionareamongthemostnegativelyaffectedfromclimatechange.Nepalhasincludedpledgesonallfrontsandincorporatedthemintoitsnationalplanforgreengrowthasof2021.Bhutanhasgreengrowthembeddedintheconstitution,anditcontinuestomakegreateffortstowardsdecarbonization,despitealreadybeinganegativeemitter(acarbonsink).AfghanistanandMaldivesdidnotmakespecificpledgesatCOP26.Botharehighlyvulnerabletoclimatechange(especiallyAfghanistanthroughfoodinsecurityamidlostcrops).MaldivesemitsaminisculeamountofGHGs(thoughithasastrongseawildlifeconservationprogram,whichithasmadepartofsustainabletourism).40Appendix2.Primaryenergyuse,energypricesandemissionsTableA.2.SelectedSouthAsianeconomies:priceincreasesforhouseholdfossilfuels,2030(Inpercentvs.BAUforUS$25carbontax/tonCO2ebyproductandeconomy)Source:Authors’estimatesusingCPAT.SriLankaisanegativeoutlier,duetosubstantial(generation)fuelswitchingto(cheaper)renewablesinthepowersector,whichisassociatedwithanetreductioninresidentialsectorelectricityprices(the2030shareofrenewablesinSriLanka’spowersectorisestimatedtoincreaseby10percentagepointsinresponsetotheUS$25carbontax/tonCO2ecarbontax).FigureA.1SouthAsia:ReductionsinGHGemissions(excl.LULUCF),2030(Inpercentvs.BAUforUS$25carbontax/tonCO2ebyeconomy)Source:Authors'estimatesusingCPAT.Themostimportantfuelsintermsofeconomy-wideenergydemandarecoalinIndiaandnaturalgasinBangladeshandPakistan.NepalandSriLankarelymoreonbiomass,whichincludesfirewood.EconomyProductCoalElectricityNaturalGasNon-RoadOilGasolineDieselKeroseneLPGBangladesh17.76.69.820.66.010.810.714.9India35.923.27.520.65.97.521.89.2Nepal14.70.15.020.66.89.37.65.4Pakistan17.24.410.320.610.511.816.68.7SriLanka14.8-21.85.320.68.512.218.47.4SouthAsia(SimpleAverage)20.12.57.620.67.510.315.09.141TableA.3.SelectedSouthAsianeconomies:totalprimaryenergyuse,2019(Inpercentoftotalprimaryenergyusebyenergysourceandeconomy)Source:IEA(2021).Note:‘Biomass’includesfirewood.EnergySourceEconomyBangladeshIndiaNepalPakistanSriLankaTotalCoal9.547.36.612.113.041.3Naturalgas55.83.10.024.00.07.2Non-roadoil4.56.8-0.38.19.96.8Gasoline1.54.02.97.712.94.3Diesel9.18.99.97.514.98.9LPG0.13.33.60.95.93.0Kerosene0.30.80.30.20.10.7Nuclear0.01.40.02.40.01.4Non-biomassrenewables0.23.26.02.53.83.0Biomass19.021.371.034.539.623.40.0Total10010010010010010042Appendix3.Roadmapforenergypricereform1)Createestimatesofenergyproductioncostsandprofitabilityoffirmsinthesector,especiallystate-ownedfirms.Understandwhobearsthe(full)incidenceofsubsidies.Maketheschememoretransparent,sothatitiseventuallyentirelyfinancedfromthebudget.2)Duringthebudgetprocess,inadditiontotaxexpenditures,delineatenotonlyhowmanyresourcesareallocatedtosubsidies(shareofbudget),butalsowhobenefitsandwholosesfromsaidtaxexpenditures.Advertisealternativepurposesthatfundscouldbeusedtowards—particularlyhealth,education,andinfrastructuretransfers.3)‘Depoliticize’subsidies:passabudgetlawthatspecifiesaformulafordeterminingsubsidyrates.Saidformulashouldbemadepubliclyavailableanddifficulttochange.4)Takeadvantageofhighoilpricestodeviseaformulaviawhichthesubsidyratefallswiththepriceofthecorrespondingfuel.5)Announceacarbonprice(tax),whichwillbepartofthesamereforminfrastructureasthesubsidyscheme.Inotherwords,thegovernmentshouldalsoshowhowthepricechangeisdirectlyusingrevenuesfromthecarbonprice(tax)topayforfundingnewrenewableenergyinfrastructureortargetedcashtransferstohouseholds.Itisveryimportantthatthisadvertisingcampaignbeanintegralpartofany(fossil)fuelsubsidyreformscheme.6)Atfirst,frontloadpaymentstohouseholds(i.e.,cashtransfersshouldbepaidatthebeginningofeachperiod).7)Activelysupportenergyproducerswhomaybeleftwithstrandedassets(suchascoalmines).Thiscanbedonethroughlaborretrainingandreallocationoffunds,feebatesandassistanceindecommissioningassets.Themostaffectedcommunitiesshouldbeimmediatelyidentified,andtraining/jobrelocationprogramsinitiatedearlyon.SeeMcCulloch(2023),Coadyetal.(2015)andVagliasindi(2013)forfurtherdiscussionoftheseissues.

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