Carbon Pricing and Household Welfare : Evidence from Uganda

Policymakers frequently voice concerns that carbon pricing could impair economic development in the short-run, especially in low-income countries such as Uganda. We estimate a consumer demand system for energy and food items to assess how households’ welfare, and demand for food and energy, can be expected to react to a carbon price of US$40/ton. The results show modest and overall progressive welfare effects of carbon pricing, in the range of 0.2 – 1.8%, across the population. We observe declines of 15 – 59% in the demand for electricity, kerosene and charcoal, with concomitant shifts within food consumption baskets, due to complementarities with cooking fuels and negative income effects. Heterogeneous demand responses across expenditure terciles reveal disparities in biomass and food consumption, as well as nutritional intake, due to carbon pricing. Around half of the Ugandan population experiences declines of up to 2.4% in food and nutrient consumption with disparate effects within income groups, revealing important “horizontal” equity considerations. Complementary social protection policies in conjunction with carbon pricing could potentially ease adverse effects on economic development in Uganda