Opinion

Climate policies risk increasing social inequality

The aggressive political interventions needed to effectively counteract climate change will make the rich richer and the poor poorer, if social concerns are not given greater prominence in policy debates.

By: and Date: February 8, 2018 Topic: Energy & Climate

This opinion piece was also published by El País, Hospodárske noviny and Ta Nea.

Ta Nea logo

Europe has only 30 years to stop fuelling cars with gasoline, producing electricity from coal, and heating homes with oil, or it will fall short of its agreed contribution to the fight against climate change.

Such a profound shift will require massive political interventions: standards will prohibit certain technologies, carbon taxes will make the use of dirty energy expensive, and public programmes will encourage the deployment of cleaner technologies. Compared to existing climate policies, future interventions will need to be significantly more aggressive. While today’s carbon price is below €10, for example, carbon prices of more than €100 might be necessary to discourage emissions in 2050.

These policies will not only have an impact on the economy, but will also feature significant distributional consequences. Poorer households that cannot afford expensive new electric vehicles will get stuck paying substantial carbon taxes for using their old Dacias. Ironically, governments would then be using the corresponding fuel-tax revenue to subsidise richer households buying a Tesla.

Poorer households typically do not own houses and therefore cannot actively invest in publicly subsidised solar panels, energy-efficiency measures or charging stations. And even if they own houses, they do not have access to capital to finance these investments. Thus, they will pay an increasing share of their low income on pollution penalties while richer households – who anyway use a lower share of their income for energy services – can afford to invest in switching away from fossil fuels to avoid paying increasing carbon taxes. So the cost of increasingly aggressive climate policies would fall disproportionately on poorer households.

By contrast, companies still receive free emission allowances and tax rebates on energy to strengthen them in international competition. These companies often still hand over the full carbon cost to their final consumers. At the same time, the massive investment needed to switch to a low-carbon economy implies a huge demand for capital – the World Bank speaks of an additional US$4 trillion in investments in the next 15 years. Higher capital demand translates into higher capital cost, meaning that capital owners can expect higher returns.

In this way, increasingly aggressive climate policies could make the rich richer while making the poor poorer. Growing inequality will reduce economic growth and political stability. Distributive effects will undermine the political acceptability of climate policies. But the alternatives – ignoring climate change, or not pushing poorer households to reduce their carbon footprint – are not viable. Poorer households are suffering disproportionately from climate change itself, having less capacity to adapt to changing conditions or to insure against climate risks.

It will become increasingly important to address the distributive effects of climate policies going forward, and this starts with the way climate policies are developed. Climate policy discussions are currently dominated by industry representatives (including trade unions from polluting industries) and environmentalists, but social concerns are rarely represented. This needs to change to make all decision-makers and experts think harder about the fairness aspects of climate policies.

One obvious opportunity lies in the redistribution of increasing carbon tax revenues. If a larger share of these revenues can be used to reduce the carbon footprint of poorer households – for example, by providing them with finance to invest in more energy-efficient appliances – they would actually benefit from climate polices. We should also think about how we tax different carbon sources. While electricity taxes are highly unfair for poorer households that traditionally spend a much higher share of their income on electricity, fuel taxes tend to fall more heavily on richer households.

With enough political will, the distributional impact of climate policies can be mitigated. This is crucial, because otherwise the necessary massive interventions – with carbon prices more than 10 times the current levels – will not be politically acceptable.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Upcoming Event

Dec
15-16
11:30

India-EU Partnership: Vistas for the New Decade

Serving and retired government officials, representatives of the private sector, media and institutions/academia come together to review the of India-EU relations and point to a promising direction for the future.

Speakers: Yamini Aiyar, Suman Bery, Navroz K Dubash, Ignacio Garcia Bercero, Alicia García-Herrero, Rajat Kathuria, Gautam Mukhopadhaya, Ananth Padmanabhan, Georgios Petropoulos, André Sapir, Shyam Saran, Simone Tagliapietra and Guntram B. Wolff Topic: Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Opinion

2021 can be a climate breakthrough, but Biden and Europe need to talk

"2021 can be a breakthrough year for climate: the new US administration and the EU have a real opportunity, through a ‘global net zero coalition’, to remove some of the key bottlenecks in the global path to climate neutrality."

By: Simone Tagliapietra Topic: Energy & Climate Date: November 9, 2020
Read article More on this topic More by this author
 

Opinion

Understanding the world of tomorrow through the great challenges of energy and climate change

“Only a broad policy framework – taking into account economic, fiscal, industrial, labour, innovation and social policy issues – can address the challenges of the climate crisis in a balanced way.”

By: Simone Tagliapietra Topic: Energy & Climate Date: October 26, 2020
Read about event
 

Past Event

Past Event

Bruegel Annual Meetings 2020 - Day 3

Third day of Bruegel Annual Meetings.

Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: September 3, 2020
Read article More on this topic
 

Opinion

Can households in the European Union make ends meet?

Half the households surveyed by Eurostat see themselves as unable to find the resources they would need to cope with an unexpected expense within a month, estimated by experts at €375 in the case of Greece.

By: Maria Demertzis, Marta Domínguez-Jiménez, Annamaria Lusardi and Bruegel Topic: Finance & Financial Regulation Date: July 24, 2020
Read article
 

Blog Post

One last push is needed to improve the Just Transition Fund proposal

The European Parliament and the Council still have an opportunity to improve the Just Transition Fund by refocusing it on social support and basing fund allocations on more granular information that takes into account not only countries’ needs but also their green ambitions.

By: Aliénor Cameron, Grégory Claeys, Catarina Midões and Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: June 11, 2020
Read about event More on this topic
 

Past Event

Past Event

(Em)powering the recovery

What role will the energy sector play in the post crisis recovery and will this recovery be a green one?

Speakers: Kadri Simson, Francesco Starace and Guntram B. Wolff Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 28, 2020
Read article Download PDF
 

Policy Brief

Rebooting Europe: a framework for a post COVID-19 economic recovery

COVID-19 has triggered a severe recession and policymakers in European Union countries are providing generous, largely indiscriminate, support to companies. As the recession gets deeper, a more comprehensive strategy is needed. This should be based on four principles: viability of supported entities, fairness, achieving societal goals, and giving society a share in future profits. The effort should be structured around equity and recovery funds with borrowing at EU level.

By: Julia Anderson, Simone Tagliapietra and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance Date: May 13, 2020
Read article More on this topic More by this author
 

Blog Post

COVID-19: The self-employed are hardest hit and least supported

Self-employed workers are hardest-hit by COVID-19 lockdowns. Yet they often receive less government support than salaried employees. Is the disparity justified?

By: Julia Anderson Topic: European Macroeconomics & Governance Date: April 8, 2020
Read article More on this topic More by this author
 

Blog Post

How COVID-19 is laying bare inequality

COVID-19 is laying bare socio-economic inequalities and could exacerbate them in the near future. The virus is a risk factor particularly for those at the lower end of the income distribution, who are vulnerable to the interaction of the shock with income, socio-economic and urban inequalities.

By: Enrico Bergamini Topic: Global Economics & Governance Date: March 31, 2020
Read about event More on this topic
 

Past Event

Past Event

CANCELLED: India-EU Partnership: New Vistas for the Next Decade

Policymakers, academics and private sector actors from the EU and India come together to work on common issues and explore further areas of cooperation.

Speakers: Yamini Aiyar, Suman Bery, Navroz K Dubash, Alicia García-Herrero, Rajat Kathuria, Partha Mukhopadhyay, Ananth Padmanabhan, Georgios Petropoulos, André Sapir, Shyam Saran, Simone Tagliapietra and Marc Vanheukelen Topic: Global Economics & Governance Location: India International Centre, Lodhi Gardens, Lodhi Estate, New Delhi, Delhi, India Date: March 12, 2020
Read about event More on this topic
 

Past Event

Past Event

On gains, losses, and trade-offs: the case of Border Carbon Adjustment

How will the border carbon adjustment be implemented and what will be the implications?

Speakers: Gabriel Felbermayr, André Sapir and Georg Zachmann Topic: Energy & Climate Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 5, 2020
Load more posts