How to protect our transition to a decarbonized society?

A post by Xavier Labandeira (University of Vigo), member of the Core Expert Group of the project LIFE DICET

In recent weeks it has become clear that the road to decarbonization of our economies will not be an easy one. Despite the fact that the population of advanced countries is increasingly concerned about the problems of climate change, protests are multiplying against the increase in energy prices brought about by climate policies. Additionally, in some places, the accelerated expansion of renewables is beginning to be discussed. The phenomenon is widespread: as an example, the recent negative result of the Swiss referendum on the climate change law, supported by almost all political forces. Although there are many factors that explain the disparity between the desires and practices of the population, distributive issues (who, apparently, benefits and who bears the costs of the transition) undoubtedly play a fundamental role.

It is surprising that the solution to an essentially distributional problem such as climate change, caused by the higher emissions of the wealthiest and suffered by those who have less because of their lower capacity to adapt (between countries and within each country), could end up being hindered precisely by questions of equity. Particularly because we know that the costs of mitigating climate change are modest overall, since the emergence of new sectors and activities compensates for the damage to the current productive fabric and, of course, are far removed from the immense costs of not tackling this problem and other environmental phenomena associated with fossil fuel combustion. What is the problem then? As simple as the fact that these favorable aggregate calculations hide the concentration of costs in specific groups, in certain territories, activities or income levels.

It is also surprising that we find these stones in the way precisely in the exit of the pandemic crisis, which was supposed to be ‘green’. Or not: at the moment, the wounds of the coronavirus, which, once again, has hit those who have less, are coming together with an intensification of climate policies that will make it possible to meet the ambitious objectives agreed in Paris in 2015. We are, at last, moving from words to actions and thus the disruptions associated with a process of structural change are beginning to be seen. Unfortunately, the room for maneuver to tackle the climate problem and achieve the agreed targets is becoming smaller and smaller and paralyzing now the corrective policies that facilitate the transition is not an option. It is not from an environmental point of view, nor from an economic point of view, nor, above all, from the point of view of social equity. We cannot allow the snowball to grow further and make it impossible to manage at reasonable socioeconomic costs.

In this context, how can we design a roadmap that safeguards the transition and is socially acceptable? First of all, by taking advantage of the favorable tailwind: climate mitigation alternatives -renewables implemented in an orderly and sustainable manner, batteries or energy-efficient products- are increasingly cheaper. Moreover, the world’s major economies are beginning to align their efforts in the fight against climate change, and this will limit the potentially harmful effects on competitiveness. Secondly, it is essential to minimize the costs of climate policy in order to reduce its distributional costs. We know that decentralized options, such as carbon pricing, are highly cost-effective and we must therefore continue to favor them.

However, the distributional Gordian knot remains intact and will impede progress if we do not take additional measures. It is probably necessary, first of all, to abandon the rosy narrative of the energy transition and make it clear to the public that the road to a substantially better situation in the medium and long term will be full of obstacles. In this regard, it should be also emphasized that the economic and distributional impacts of not acting now will be very negative. Secondly, in order to be able to travel this rocky road, it will be necessary to immediately design and implement compensatory distributional measures for those most affected by the decarbonization process. In my view, these measures must have several characteristics: they must preserve, not hinder, the corrective action of climate policy; they must focus exclusively on the most vulnerable (territories, sectors and income groups); and they must be capable of fully reversing the negative effects in the short term and solving the distributional problem in the medium term.

It makes no sense, therefore, to delay the progress of the transition by keeping the prices of energy products, particularly fossil fuels, artificially low in order to protect the less affluent. Firstly, because this prevents the behavioral and investment changes necessary for climate correction from being adopted, further fattening the snowball I referred to earlier. As if that were not enough, these clumsy measures end up benefiting, with the excuse of protecting certain social groups, affluent people because of their high energy consumption. Precisely for this reason, generalized compensatory strategies do not make any sense, and it is urgent to be very selective in their application. One of the most important of these is what we could call a ‘green check’, a monetary transfer that serves to fully compensate only certain groups for the extra costs caused by the action of climate policy without undermining incentives for energy efficiency or fuel switching. In this case, we are dealing with sophisticated, personalized measures, which today we could define and implement without too many difficulties in any advanced country. 

The green check would serve to reconcile an effective climate policy with the short-term protection of those particularly affected by the transition. But to tackle the distributional problems in the medium term, it would be necessary to act decisively on the source of the effects: the equipment. Many affected groups find it difficult to react to the impacts of climate policies because they do not have the means to renew, for example, their vehicle or heating system. Unfortunately, existing public programs for equipment replacement should be improved both in terms of coverage and intensity. It is not the time for general approaches that, once again, end up benefiting those who need it least and whose environmental effectiveness is debatable because many of the beneficiaries would have had access to new equipment without such aid. However, by concentrating these programs on certain sectoral or territorial groups or by income level, and by covering a large share of the cost of the change of equipment, we would be able to deal with persistent distributional impacts of climate policies. Let us not forget, moreover, that these strategies would have a considerable positive effect on the new green economy, generating new jobs, and would further reduce the cost of clean technologies. In short, a virtuous circle.

In sum, it is time to step up a gear and give our climate policies a boost. We must continue to increase their intensity and simultaneously devote large public resources, which can actually be generated by the very implementation of these policies, to reduce their distributional impacts in a selective and resolute manner.

An earlier version of this blog post was published in Spanish under the title “Fair compensation for the green transition” in El País (18 June 2021).

The views and opinions expressed in this post are solely those of the author(s) and do not reflect those of the editors of the blog of the project LIFE DICET.