Governments in these countries operate within constrained fiscal space, making it difficult to address critical challenges such as climate adaptation, infrastructure investments, and building fiscal buffers to withstand climate shocks.  

Domestic Revenue Mobilization (DRM) is a key mechanism for building resilience through the use of effective fiscal instruments. For example, introducing climate policies such as  carbon taxes can help mobilize domestic revenues while simultaneously reducing emissions. Similarly, phasing out existing environmentally harmful policies like fuel subsidies offers substantial revenue potential. 

However, these measures must be carefully designed to address concerns about their incidence and equity. Global South countries are still relatively undiversified and rely on primary production and significant informal and agricultural sectors as sources of employment and income. It is therefore challenging to design effective and efficient taxation policies which also address equity concerns.

Furthermore, the challenges associated with expanding fiscal space, using environmental policies, and accelerating structural transformation are all closely connected to the critical questions of climate change adaptation and mitigation. Countries in the Global South are typically more susceptible and vulnerable to the impacts of climate change given their warmer climates and limited adaptive capacities. Hence, there is an urgent need to improve the capacities of households to adapt.

This project explores the impacts of environmentally motivated policies on household responses and welfare, as well as on the structural transformation of Global South countries. Carbon tax policies and the removal of fossil fuel subsidies are important policy tools for steering economies toward zero-carbon pathways while at the same time building fiscal space. 

The research examines how these measures can be designed to promote environmental sustainability and to support a just energy transition, while also considering social equity. The purpose of the research is to understand the impacts of environmental taxes (or higher costs of fossil fuel energy) on households, firms, and the environment in Global South countries, while retaining a focus on the cross-cutting theme of climate change.

Key questions

• Climate policies – incidence, responses, and welfare: What are the impacts of environmentally oriented policies on household behaviour and welfare? What are the margins of adjustment and how are they used? What are the distributional impacts of environmental fiscal policies? How well do current tax-benefit systems perform in protecting the most vulnerable and raising revenue from the better off to accommodate social protection for the poor? How would abolition of fuel subsidies affect poverty and inequality?
• Just energy transition and structural change: What is the nature of structural transformations in a Global South context, given the impacts from climate change and the introduction of environmental fiscal policies? How do various transition frictions contribute to slow the just transition or exacerbate inequalities? What are the roles of informality and migration in the structural transformation driven by environmental fiscal policies and climate change? What are the critical elements and policies required to ensure a just transition?

Watch this space

All requests for research proposals, events, working papers, data updates, and journal articles related to this project will be available here.