New tool for socially equitable carbon pricing

Carbon pricing is one of the most effective ways of reducing climate-damaging emissions. In fact, it creates a double incentive – allowing both industrialised and developing countries not only to strengthen their nationally determined contributions (NDCs) under the Paris Agreement but also to generate revenue that can be used to meet development goals. However, the obstacles to implementing such schemes are often considerable, especially in developing countries and emerging economies. A new digital calculation platform – presented at COP28 in Dubai by the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and Mercator Research Institute on Global Commons and Climate Change (MCC) – is designed to overcome those obstacles.

Carbon pricing can take various forms, including taxation, emissions trading systems (ETS) and the removal of subsidies for fossil fuels. All these mechanisms have one thing in common: they lead, initially at least, to higher prices for people. Poorer households are among those most likely to feel the impact. To find a way around this problem, MCC Berlin in cooperation with GIZ’s Leonie Kirchhoff, Gregor Sahler and colleagues, came up with the idea of an interactive and publicly accessible platform. The Carbon Pricing Incidence Calculator works out – for over 80 countries – how carbon pricing would affect the population and how governments can design mechanisms that are socially equitable. ‘It’s absolutely vital during the planning stage to factor in the likely price increases and to mitigate their impact on those groups that will be hardest hit,’ says Sahler.

Increasing acceptance among the population

The digital calculation tool developed together with MCC models the socioeconomic impact of carbon pricing and various compensation measures on different households. The tool can be used by governments, unions, business associations and both welfare and environmental groups to negotiate a socially equitable approach to climate financing policy. ‘If the implications are discussed and any adverse impacts avoided right from the start, the mechanism is more likely to be accepted among the population and by decision-makers,’ explains Sahler. In turn, that boosts the chances of reforms being introduced that not only protect the climate but also – in the ideal scenario – reduce social inequality.

GIZ is directly channelling what it has learned into its advisory work in Uganda and Mexico. Together with its partner ministries in these countries, it is currently developing policy recommendations on socially equitable carbon pricing.