by Jule Hodok
The direct impacts of climate change are unevenly distributed across countries, regions, and socioeconomic groups. Inaction will not only result in significant macroeconomic costs but also deepen existing inequalities (Intergovernmental Panel on Climate Change (IPCC), 2023). However, climate mitigation policies designed to reduce the emission of greenhouse gases (GHGs) also have distributional effects. A new report by the OECD Economics department reviews the distributional consequences of climate change and climate change mitigation as well as illustrates the trade-offs between equity, efficiency, and effectiveness in the design of climate policies.
Unequal impacts of climate change
The extent to which a specific group of people, regions and countries are affected by climate change is determined by their exposure and vulnerability:
- “Exposure” is the presence of people, livelihoods, species, or ecosystems in places and settings that could be adversely affected by environmental degradation.
- “Vulnerability” is the tendency to suffer from the adverse effects and/or the lack of capacity to cope or adapt after exposure to climate change (Intergovernmental Panel on Climate Change (IPCC), 2023).
Developing countries are on average more exposed to climate change due to a combination of factors, such as often higher baseline temperatures, higher likelihood of droughts, and the reliance on climate-sensitive sectors, such as agriculture which is highly affected by temperature and precipitation levels (IPCC, 2023). They are also more vulnerable due to lower levels of adaptive capacity and resilience (Bilal & Känzig, 2024; Frankhauser, 2017) (Figure 1).
Figure 1. Predicted mortality cost as a share of GDP under a high emissions scenario
Notes: Estimates are based on a high emission scenario (RCP 8.5) for the end of the century (2080-2099). The methodology for estimating the mortality costs of climate change (temperature-related) derived from (Carleton, et al., 2022). Mortality costs are just one part of health-related impacts of climate change and account for an even smaller share of the overall costs of climate change.
Source: (Climate impact Lab, 2024)
Within countries, drawing clear, general conclusions of the impact of climate change is more difficult. Still, for example, urban areas often face higher risks of extreme temperatures and flooding (Frankhauser & McDermott, 2016), while rural communities tend to be more vulnerable due to a stronger reliance on resource-based industries (OECD, 2021). Evidence also suggests that lower-income households tend to be disproportionately affected, as they often lack the resources to adapt to climate change, e.g. by not being able to afford adaptive technologies, or lower access to quality healthcare and insurance (Bijnens, et al., 2024; Islam & Winkel, 2017).
The distributional impacts of climate change mitigation
While mitigating climate change can, over the longer term, help alleviate some of the distributional concerns related to the direct impacts of climate change, climate policies themselves have distributional consequences, from both an income and consumption perspective.
From an employment and income perspective, the climate transition will trigger a reallocation of labour and capital, from “high-emission” sectors, firms, and activities to low carbon emitters. For example, research estimates that in response to a global tax of USD 50/tCO2, fossil fuel industries – which tend not to be large employers overall – would experience a decrease in employment and output, while the largest job gains would occur in low-carbon power generation (Chateau, Bibas & Lanzi, 2018) (see Figure 2 for an overview of sector-specific effects). However, as high-emission industries tend to be regionally clustered, such labour market effects are likely geographically concentrated, potentially widening regional inequalities within countries (OECD, 2021; OECD, 2023). Additionally, low-skilled workers and those with lower educational attainment are often most negatively affected as they tend to face higher barriers to reskilling and job mobility (OECD, 2023; Chateau, Bibas, & Lanzi, 2018).
Figure 2. Change in output, employment, and gross wage by sector in response to central scenario
Notes: a carbon tax of USD 50/tCO2 is applied in all regions of the world; percentage change w.r.t reference equilibrium, 2011; OECD ENV-Linkages computable general equilibrium (CGE) is used as a tool for the analysis.
Source: (Chateau, Bibas, & Lanzi, 2018)
From a consumption perspective, policies that result in changes in relative prices will affect households differently if they have different consumption patterns. Four key findings emerge based on the review of existing literature:
- In advanced economies, carbon and energy taxation is mostly regressive (Flues & Thomas, 2015; Douenne, 2020; Immervoll et al., 2023). The regressivity often stems from the fact that food and some fuels are a necessity for many households making poorer households unable to reduce their consumption in response to higher prices (Figure 3) (Vandyck et al., 2023; Elgouacem, et al., 2024).
- In developing countries, carbon and energy taxation often are progressive. This stems from the fact that a large subset of the population has low incomes and relatively limited fossil fuel energy use. Developing countries are therefore particularly confronted with the trade-off between energy affordability and addressing climate change as even a small increase in the price of energy may significantly aggravate energy poverty (Dorband et al., 2019; Steckel, et al., 2021).
- The regressivity of policies depends on the specific policy in question and the type of fuel that is targeted. For example, transport fuel taxation is neutral in countries with higher GDP per capita and progressive in countries with lower GDP per capita (Flues & Thomas, 2015; Missbach et al., 2024). Additionally, other factors than income drive distributional effects. For example, most evidence shows that rural households are more vulnerable to carbon taxation, due to limited access to public transport (Causa et al., 2022).
- Non-market-based policies – including bans, standards, and direct regulation – tend to disproportionately affect lower-income households and may result in equity concerns through possibly unaffordable replacement costs of the emission-intensive good (Elgouacem, et al., 2024). Limited research on subsidies and feed-in-tariffs (e.g. for electric vehicles, solar panels, or home insulation) suggests that they tend to primarily benefit higher-income households who have the required capital to invest in the low-carbon solution (Borenstein & Davis, 2016; Levinson, 2019).
Figure 3. Household expenditures on fuel and other energy, by income decile
Note: Groups 1-10 refer to income deciles. Domestic fuel includes expenditure on gas, liquified hydrocarbons, kerosene, and other liquid fuels, coal, and other solid fuels. Motor fuels includes expenditure on diesel and petrol for transportation.
Source: (Elgouacem, et al., 2024), (Screenshot, Figure 5.5 in paper)
Overall, integrating equity and fairness considerations in the design of climate policies and broader climate strategies can help manage their distributional impacts and improve the social acceptability of a climate transition.
References
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