Welfare effects of carbon taxation on South African households

This paper evaluates the welfare impacts of carbon taxation on South African households. Using household sur-vey data for the period 2009-2015, I estimate the Quadratic Almost Ideal Demand System (QUAIDS) model to ob-tain elasticities and use them to simulate consumer responses to price changes resulting from carbon taxation. Results show that an increase in electricity and public transport prices following a carbon tax policy is regressive while a price increase in motor fuel is progressive. In addition, when there is a simultaneous increase in the prices of energy goods, the poorest and middle income households disproportionately suffer a higher welfare loss com-pared to the richest households. I also show that income is important in determining whether rural households experience a higher or lower welfare loss than urban households. Furthermore, revenue recycling in terms of lump-sum transfers of the tax revenue to households below the national poverty lines and the bottom 40% would offset the welfare loss from a carbon tax policy in South Africa. (c) 2020 Published by Elsevier B.V.