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 article More by this author
 

Opinion

Why China should fear the EU's carbon border tax

Expect Beijing to soon start lobbying against the proposal.

By: Alicia García-Herrero Topic: Energy & Climate, Global Economics & Governance Date: July 26, 2021
Read about event
 

Upcoming Event

Sep
3
10:15

Sustainable finance

Bruegel Annual Meetings, Day 3 - In this session on the final day of the Meetings, our panelists will discuss the future of finance and its sustainability.

Speakers: Maria Demertzis, Alberto De Paoli, Pierre Heilbronn and Alexandra Jour-Schroeder Topic: Energy & Climate, Finance & Financial Regulation Location: Palais des Académies, Rue Ducale 1, Brussels
Read article More on this topic More by this author
 

External Publication

A Safety Net for the Green Economy

How to protect workers hurt by the fight against climate change.

By: Simone Tagliapietra Topic: Energy & Climate Date: July 20, 2021
Read article More by this author
 

Blog Post

The European Union’s carbon border mechanism and the WTO

To avoid any backlash, the European Union should work with other World Trade Organisation members to define basic principles of carbon border adjustment mechanisms.

By: André Sapir Topic: Energy & Climate, Global Economics & Governance Date: July 19, 2021
Read article More on this topic
 

Blog Post

Making sure green household investment pays off

Policies are needed to support green fuel switching by households; support should be phased out as the carbon price rises.

By: Ben McWilliams and Georg Zachmann Topic: Energy & Climate Date: July 19, 2021
Read article More on this topic More by this author
 

Podcast

Podcast

A fitting plan for the European Green Deal?

How does the world's first roadmap for meeting climate goals stack up?

By: The Sound of Economics Topic: Energy & Climate Date: July 15, 2021
Read article Download PDF
 

External Publication

Building the Road to Greener Pastures

How the G20 can support the recovery with sustainable local infrastructure investment.

By: Mia Hoffmann, Ben McWilliams and Niclas Poitiers Topic: Global Economics & Governance, Testimonies Date: July 15, 2021
Read article More on this topic More by this author
 

Opinion

‘Fit-for-55’ package: Squaring the circle

The European Union finds itself at the centre of a three-dimensional puzzle. Burdens need to be shared between 450 million citizens, 25 million businesses and EU countries in a way that is acceptable to enough of them.

By: Georg Zachmann Topic: Energy & Climate Date: July 15, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic More by this author
 

Blog Post

The EU green bond standard: sensible implementation could define a new asset class

The proposed EU green bond standard will be less prone to ‘greenwashing’, and the widest possible set of issuers and jurisdictions should be encouraged to use the standard.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: July 13, 2021
Read article More on this topic
 

Blog Post

A breakdown of EU countries’ post-pandemic green spending plans

An analysis of European Union countries’ recovery plans shows widely differing green spending priorities.

By: Klaas Lenaerts and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: July 8, 2021
Read article Download PDF More on this topic More by this author
 

Policy Contribution

The risks from climate change to sovereign debt in Europe

European Union institutions and national fiscal authorities should incorporate climate risk in debt sustainability analysis.

By: Stavros Zenios Topic: Energy & Climate Date: July 8, 2021
Load more posts