Double progressivity of infrastructure financing through carbon pricing - insights from Nigeria

Abstract

Carbon taxes and fossil fuel subsidy reforms have been recognized as an efficient means to mobilize substantive domestic resources for sustainable development. Yet, despite their advantages compared to other taxes, concerns about potential adverse impacts on poverty and inequality have discouraged many countries from such fiscal reforms. This paper analyzes the absolute and relative equity effects of a comprehensive carbon pricing reform on households within and between income groups in Nigeria. We further analyze the distributional effects of revenues being recycled into basic infrastructure development and social safety nets. We assess the consumption effects of six policy packages across rural and urban income groups, combining environmental-extended input-output data with detailed household survey data. Our results suggest double progressivity. Lower-income households would bear a relatively smaller consumption burden from carbon pricing, and additionally enjoy greater gains from uniform cash transfers or access to improved water, sanitation, electricity, or telecommunication infrastructure. Additionally, such investments would disproportionally benefit the overall poorer rural population due to larger existing access gaps.

Keywords: carbon pricing; infrastructure investment; distributional effect; sustainable development; microsimulations; Nigeria

JEL Classification: D57; Q52, Q54; O18