Book

The distributional effects of climate policies

The distributional consequences are likely to be a major driver of future climate policies. Policymakers will not accept forceful decarbonisation poli

Publishing date
14 November 2018

This report was produced with the financial support of Fondazione Cariplo.

To limit the global temperature increase to well below two degrees Celsius above pre-industrial levels, mankind needs to stabilise the concentration of greenhouse gases in the atmosphere by the middle of this century. That is, industry and agriculture cannot emit more carbon dioxide and other greenhouse gases than will be absorbed. This will require a massive shift in our economies. Heating, transport, electricity and industry will have to be transitioned to a world without fossil fuels. Agriculture and industry will have to find new ways to reduce emissions.

These shifts might be eased by societal and technological shifts, such as urbanisation, and digitalisation, but decarbonisation will likely remain an uphill battle, with reduced fossil fuel consumption translating into lower fossil fuel prices, and hence a continued need for incentives to avoid using the remaining fossil resources.

Consequently, climate policy will play a substantial role in this deep transformation. Given the challenge, policies need to be quite intrusive. Such intrusive policies will likely have substantial side effects, including distributional effects. Depending on (1) the policy tool, (2) the sector addressed, (3) the design of the policy, and (4) the initial socio-economic conditions in the country, individual climate policy measures can have very different distributional effects. To combat increasing inequality and improve the political acceptability of decarbonisation, these distributive effects need to be addressed. Should this not occur, there is a real possibility that decarbonisation policies will face a political backlash.

We focus on the impact of specific climate policies on households with different income levels. Policies that make low-income households better off, relative to high-income households are called progressive. Policies that have the opposite effect are called regressive. And policies that equally affect high and low-income households are called proportionate. We argue that households with lower incomes are affected differently by individual climate polices compared to higher-income households because they:

  • Face budget constraints that lead them to prefer different consumption baskets;
  • Have higher discount rates/feature borrowing constraints that prevent them from procuring more efficient durables;
  • Have different skill endowments and hence wages; and
  • Earn less income from capital and land.

We find that key climate policy tools such as carbon taxes for different fuels, certain mandatory standards, subsidies and regulatory tools, can be regressive. For other climate polices, such as trade policies, public investment and agriculture policies, the effects are less clear. And for fuel taxes on aviation, for example, the effect might be progressive. As the example of the current feed-in tariff designs and the allocation rules in the European Union’s emission trading system demonstrate, the detailed policy design matters.

While climate policies can have adverse distributional effects, non-action cannot be the answer. Non-action would make everybody worse off and would affect low-income households more than high-income households. There is hence no trade-off between climate and equity. The question is how we design climate policies to minimise any adverse distributional effects.

About the authors

  • Georg Zachmann

    Georg Zachmann is a Senior Fellow at Bruegel, where he has worked since 2009 on energy and climate policy. His work focuses on regional and distributional impacts of decarbonisation, the analysis and design of carbon, gas and electricity markets, and EU energy and climate policies. Previously, he worked at the German Ministry of Finance, the German Institute for Economic Research in Berlin, the energy think tank LARSEN in Paris, and the policy consultancy Berlin Economics.

  • Grégory Claeys

    Grégory Claeys, a French and Spanish citizen, joined Bruegel as a research fellow in February 2014, before being appointed senior fellow in April 2020.

    Grégory’s research interests include international macroeconomics and finance, central banking and European governance. From 2006 to 2009 Grégory worked as a macroeconomist in the Economic Research Department of the French bank Crédit Agricole. Prior to joining Bruegel he also conducted research in several capacities, including as a visiting researcher in the Financial Research Department of the Central Bank of Chile in Santiago, and in the Economic Department of the French Embassy in Chicago. Grégory is also an Associate Professor at the Conservatoire National des Arts et Métiers in Paris where he is teaching macroeconomics in the Master of Finance. He previously taught undergraduate macroeconomics at Sciences Po in Paris.

    He holds a PhD in Economics from the European University Institute (Florence), an MSc in economics from Paris X University and an MSc in management from HEC (Paris).

    Grégory is fluent in English, French and Spanish.

     

  • Gustav Fredriksson

    Gustav, a Swedish citizen, worked at Bruegel as a Research Assistant in the area of Energy and Climate.

    Prior to joining Bruegel, Gustav worked as a Junior Consultant for the International Labour Organization in Zambia. He also did an internship at Frontier Economics, where he worked on energy-related issues.

    Gustav holds a MSc in Economics from the Stockholm School of Economics, which included an exchange semester at Bocconi University. His master’s thesis focused on the impact of wind power on the level and the volatility of the electricity price in the Nordic-Baltic market. Gustav also has a BSc in Economics and Business Economics from Erasmus University Rotterdam.

    Gustav’s research interests lie within the fields of energy and competition. He is a native speaker of Swedish and English, and speaks French fluently.

Related content

Report

How it can be done

Rüdiger Bachmann, David Baqaee, Christian Bayer, Moritz Kuhn, Andreas Löschel, Ben McWilliams, Benjamin Moll, Andreas Peichl, Karen Pittel, Moritz Schularick and Georg Zachmann