Working Paper - April 2021

Carbon Pricing and Household Welfare: Evidence from Uganda

Raavi Aggarwal, Sinem Ayhan, Michael Jakob, Jan Christoph Steckel
Policy makers 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 quadratic almost ideal demand system (QUAIDS) for energy and food items to assess how consumers’ welfare, energy and food demand, as well as nutritional intake, can be expected to react to a carbon price of US$40/ton. The results suggest overall progressive welfare effects in the range of 0.1 – 4.9% across the population. We further observe declines in the demand for electricity, kerosene and transport in the range of 4 – 20%, with concomitant shifts within food consumption baskets, due to complementarities with cooking fuels, and income effects. Heterogeneous demand responses across expenditure terciles and rural-urban areas reveal significant disparities in food and calorie consumption as well as protein and micronutrient intake due to carbon pricing. The bottom third of households exhibit nutritional declines of up to 16%, while middle-class urban households witness increases by around 9%. Complementary social protection policies in conjunction with carbon pricing could ease potentially adverse effects on economic development outcomes in Uganda.