Carbon pricing is posited as a key economic instrument to mitigate climate change. In the context of developing countries, however, carbon pricing can pose significant short-run economic costs. Increases in energy prices can induce substitution towards untaxed solid fuels for domestic cooking. The rise in biomass consumption can exacerbate (i) public health costs due to indoor air pollution from burning biomass, (ii) deforestation and forest clearing, particularly in regions with existing rainforest carbon sinks, and (iii) women’s time spent on fuel collection vis-à-vis participation in the labour market, given 80% of biomass consumed in low-income regions is collected by women from local forests. Whether implementing a carbon price in developing countries with several pre-existing market failures would be socially optimal, is underexamined in the literature.

In this dissertation, I investigate the potential effects of a carbon price on household welfare in low- and middle-income countries (LMICs). In the context of Uganda (chapter 2), I analyse the impacts of higher fossil fuel prices on biomass use, food consumption, nutritional intake and household welfare across the population. In chapter 3, I analyse the role of gender norms and female bargaining power within the household on optimal biomass consumption, in a context of rising energy prices. I develop theoretical models to characterise women’s labour supply for the formal market vis-à-vis time spent on fuel collection. I empirically investigate the effect of higher kerosene prices on individuals’ labour supply. In the third article (chapter 4), I compare the global environmental benefits generated from a carbon price with the local health costs of additional biomass use in a sample of six LMICs, to evaluate whether carbon pricing would be optimal in these contexts.

The results show carbon pricing could adversely impact household welfare, and reduce food consumption and nutritional intake in Uganda. Revenue redistribution through cash transfers could ameliorate the adverse effects on development. In the context of Malawi, improved gender parity within homes could reduce the dependence on biomass for cooking, in a context of rising energy prices. Distribution of fuel-efficient biomass cook-stoves could also reduce demand for biomass and allow women greater opportunities to participate in the labour market. Carbon pricing is likely to pose significant local health burdens in developing countries. These local costs exceed the global climate benefits of a carbon price in the majority of countries, even when households are compensated. In some countries, however, benefits exceed costs, particularly as households switch from polluting solid fuels towards cleaner cooking sources.