Climate-induced poverty is escalating in Africa, posing significant challenges to achieving the Sustainable Development Goals (SDGs). Carbon pricing has been identified as a promising strategy to generate revenue and mitigate its impact on vulnerable households through revenue recycling. However, academics and development practitioners argue that the efficacy of this approach is contingent upon institutional factors, an argument underexplored in the carbon tax-welfare literature. This study investigates the potential mediation effect of institutional variables on the relationship between carbon tax revenue and welfare and distribution across 33 SSA countries from 1995 to 2022, using carbon tax rates including the World Bank’s recommended $25/ton, the global average of $3/ton, and South Africa’s $8.5/ton. Employing system-GMM estimation techniques, our findings highlight the potential of carbon tax revenues to alleviate poverty in SSA, contingent upon effective institutional frameworks governing their utilization. The study concludes with actionable policy recommendations.

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Keywords

Carbon tax, Poverty, Inequality, Carbon tax revenue recycling, Welfare, Africa