Climate policy as development policy: Leveraging carbon revenues for social protection in low- and middle-income countries

Carbon pricing is widely recognized as a key tool for reducing greenhouse gas emissions. However, if implemented without compensatory measures, it can increase poverty and inequality. The aim of this paper is to examine the role of carbon pricing in generating fiscal space for expanding social protection systems in low- and middle-income countries (LMICs). Using tax-benefit microsimulation models for six countries (Ecuador, Indonesia, South Africa, Tanzania, Viet Nam, and Zambia), we assess both the direct distributional impacts of carbon pricing and the potential poverty-reducing effects of recycling revenues into social protection. Our findings show that even modest carbon pricing can mobilize substantial resources, particularly in higher-emission countries, and that channelling these revenues into targeted or categorical transfers significantly cushions households against welfare losses. The results highlight the dual role of carbon pricing: as a climate mitigation instrument and as a source of fiscal capacity for inclusive development. By reframing climate policy as a means to expand social protection, this study underscores the opportunities and constraints for designing equitable climate–development strategies in the Global South.