Vanessa Ludden, Kristina Broens

December 12, 2022

The winners and losers of climate policies: How to ensure a Just Transition

In the short-term, the distribution of benefits and costs of climate policies will be unequal between households and income groups, leading to both winners and losers. In this article, our experts provide policy makers with key mitigating actions to ensure a more Just Transition.

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Climate change is an undeniable reality in our times. Policy action at all levels – international, EU, national, regional and local – is key to support the environmental transition. Climate policies, however, come with a number of social costs, which risk being disproportionately higher for the most vulnerable groups in our societies.

In this context, social demands for a just transition, which leaves no one behind and accounts for the social and distributive effects of climate action, have been growing over recent decades. This article will exemplify the issues, lay out possible options to compensate the adverse social impacts of climate policy and thereby provide policy makers with key actions to take to this end.

In recent decades, changes in climate have impacted natural and human systems on all continents and across oceans. Going forward, research shows that these changes will continue to materialise. This will lead to an alteration of ecosystems, disruption of food production and water supply, damage to infrastructure and settlements, increased morbidity and mortality, and will have consequences for mental health and human well-being.

Policy action is key to respond to these environmental challenges and ensure the transition towards a sustainable and resilient economy. However, shifting our economies towards more sustainable production and consumption patterns – as dictated by climate policies at all levels - will imply social and economic costs.

In the medium to longer term, the overall benefits of climate policies have the potential to outweigh such costs.In the short-term, on the contrary, the distribution of benefits and costs of climate policies will be unequal between households and income groups, leading to both winners and losers.

The social costs of climate policy

People who are socially, economically, culturally, politically, institutionally, or otherwise marginalised are the most vulnerable to both climate change impacts and related policy responses and are thus most likely to lose out. The reason is twofold.

Vulnerable groups have higher sensitivity and lower adaptive capacity to climate change and related policy responses. This vulnerability is the product of intersecting social processes that result in inequalities in socioeconomic status and income, as well as in exposure. Social markers such as age, class, ethnicity, gender and income intersect and result in multidimensional inequality.

The intersectionality of inequalities causes them to mutually reinforce each other, creating self-reinforcing paths of (dis)advantage. An example of this is that income inequality is likely to have an impact on health, access to education and living environment.

In the short-term, on the contrary, the distribution of benefits and costs of climate policies will be unequal between households and income groups, leading to both winners and losers.

VANESSA LUDDEN

EU-POLICY AND JUST TRANSITION EXPERT, RAMBOLL MANAGEMENT CONSULTING

More advantaged groups are likely to gain access to better education, jobs and quality healthcare more easily compared to members of less advantaged groups, who do not have the same chances. As a result of this, inequalities in education attainment, income and health increase. As such, intersecting dimensions of inequality are drivers of multidimensional vulnerability.

In this context people’s vulnerability to climate change and climate change policies increases when there are limitations to their baseline conditions, capabilities and opportunities to adapt and adjust.

Both the academic literature and applied policy research have underlined a variety of negative social impacts that climate policies at EU and Member State level can have, including on such vulnerable groups. For example, several climate mitigation policies aim to lower the energy demand by raising its price.

While spending less in absolute terms, lower income households tend to use a larger share of their income on energy expenses (primarily heating and electricity). Energy price increases, coupled with declining disposable household incomes, put a substantial strain on lower income households.

The decommissioning of the coal industry represents a concrete and sector-specific example of the negative impacts that may be associated with climate action.

Case example: Decommissioning of the coal industry

The decommissioning of the coal industry is expected to have a negative impact on communities whose livelihoods depend on the extraction and use of coal, peat or oil shale.

As of 2018, it is estimated that the coal sector directly employed about 237.000 people in 21 Member States (108 European regions, NUTS 2 level)¹. The number of indirect jobs dependent on coal activities was, instead, approximately 215.000. Direct employment in the coal industry is strongly concentrated in Europe: out of the 108 regions where coal infrastructure is present, 20 of those account for more than 80% of the workforce employed in the sector.

Many of these jobs will become redundant in the next decade, both in direct and indirect coal activities. In the coming decade, the expected direct job losses in power plant operation due to coal fired power plant decommissioning could reach around 34.000 jobs. That is 64% of the estimated current employment (52.000) in this activity. It is also estimated that approximately 59% of the workforce in coal mining faces a high risk of being made redundant during the next decade.

With a few exceptions, the regions that will suffer the most are located in Eastern Europe, the majority of which have a lower regional GDP/capita than the national average. This highlights how important it is to support these regions throughout the transition.

What can be done to mitigate these social costs?

In light of the adverse social impacts that might stem from climate policy actions, attention to, and demands for the integration of social considerations into environmental policies has increased over the years. In this context, the goal of achieving a Just Transition, which accounts for the social and distributive effects of climate action and ensures that no one is left behind, has gained growing prominence.

Addressing the inequality outcomes of climate policies calls for a renewed approach to policy making at all levels: EU, national, regional and local. Social inequalities are to be taken into account across the policy cycle and translated into adequate compensation measures.

Multiple potential compensation measures exist. While none of these are unilaterally superior to the others, the most adequate compensation measure depends on the specific contextual factors at play in each situation. The most common compensation measures include revenue recycling, exemptions, structural adjustment assistance and holistic adaptive support.

Examples of compensation measures

Revenue recycling appears as the most popular type of mitigation measure. It consists of earmarking tax revenues for specific purposes, contributing to correcting the market distortions and negative distributional outcomes caused by the introduction of the tax.

In particular, revenue recycling may allow for:

Differentiated transfers to households, which would allow to redistribute resources towards those who are primarily affected by the policy. On the other hand, distributing lump-sum payments to households could be an alternative; however, these would not improve the regressivity of a tax, as they would maintain the gap between income groups;
Reducing labour taxes, income taxes and social security contributions, thus reducing income inequality;
Introducing redundancy benefits, unemployment benefits, early retirement benefits, pension ‘bridging’ and healthcare benefits to mitigate workers’ economic losses.

Exemptions allow specific groups of citizens to be permanently or temporarily exempted from certain climate policies. For instance, vulnerable households could benefit from a “postponed implementation”, starting to pay for the tax with a delay compared to the non-exempted households. Alternatively, a “graduated exemption” could impose lower tax rates to the most vulnerable groups, which would increase over time.

Structural adjustment assistance consists of monetary payments or in-kind assistance to ensure that households most negatively affected by climate policies can effectively adapt to “the new market conditions” they introduced.

Support can be provided in different forms, such as subsidised energy-efficient, low-carbon technology and other mechanisms (net metering systems, feed-in-tariffs and reduced VAT). In addition, investment in R&D, for instance in the form of investment in new skills, infrastructure and innovation, could also facilitate the transition of specific communities towards a low-carbon economy.

Finally, adaptive support measures include in-kind or financial support to help the most negatively affected groups to “mitigate or adapt to the full range of recognised losses — including non-financial external resources, intrinsically-valued goods, and mental and physical functionings”².

Several tools can be used in this regard, including psychological and career counselling to affected workers and their families. In the medium term, retraining of affected workers to facilitate labour market adjustment, with an emphasis on on-the-job retraining should also be provided. Investments in community social, cultural and environmental goods are yet another form of adaptive support available.

What role for policy makers in ensuring a Just Transition?

Going forward, climate mitigation and adaptation policies will continue to be of utmost importance for the transition towards low-carbon, climate resilient economies. Continued investment in research on the social impacts of such policies is therefore crucial to mitigate their impacts and ensure a Just Transition.

In this respect, already at the policy design stage, policy makers should ensure that all possible interlinkages, positive and negative spill over effects and distributional outcomes of a climate policy are investigated. This should be coupled with regular monitoring of the impacts of the policies in place and evaluation of their effectiveness.

Continuous exchange between EU/national and local/regional levels of governance is essential to ensure that the impacts of climate policies are effectively compensated for. Thus, the establishment and reinforcement of synergies between different governance levels should be sought.

Continuous exchange between EU/national and local/regional levels of governance is essential to ensure that the impacts of climate policies are effectively compensated for.

KRISTINA BROENS

SOCIAL SUSTAINABILITY EXPERT, RAMBOLL MANAGEMENT CONSULTING

Tailored compensation policies can then further contribute to addressing the adverse social outcomes of adaptation and mitigation policies. It is key that compensation policies are adapted to the local socioeconomic context of their target groups. Simultaneously, they should be sufficiently flexible to adapt to changes in climate mitigation policies’ level of ambition.

At the same time, policies where redistributive effects can potentially be achieved should be prioritised whenever possible. Policy makers should devote more efforts to design policies that simultaneously integrate social and environmental concerns, while mainstreaming social considerations from the very start of the policy cycle should become the norm. This requires a significant mindset shift in policy-making arenas. For this to happen, awareness should be raised as to why such integration is needed.

In conclusion...

Progress to achieve a Just Transition will require significant social behavioural change. Citizens will therefore need to be informed about the current policies in place, their rationale and how they can collectively contribute to their achievement. Putting in place participatory processes involving all relevant stakeholders (social partners, local communities, NGOs, citizens) will be crucial to ensuring the public acceptability of the policy at stake and its overall success.

Suggestions for further reading:

Ramboll (2021), Social Impacts of Climate Mitigation Policies and Outcomes in Terms of Inequality Burke J, Fankhauser S, Kazaglis A, Kessler L, Khandelwal N, Bolk J, O’Boyle P and Owen A. (2020), “Distributional impacts of a carbon tax in the UK: Report 2 – Analysis by income decile” Oueslati, W., et al. (2016), “Exploring the relationship between environmentally related taxes and inequality in income sources: An empirical cross-country analysis” Berry A. (2019), “The distributional effects of a carbon tax and its impact on fuel poverty: A microsimulation study in the French context” OECD (2019), “Financing climate objectives in cities and regions to deliver sustainable and inclusive growth” Green F. and Gambhir A. (2020), “Transitional assistance policies for just, equitable and smooth low-carbon transitions: who, what and how?”

Sources:

¹) Alves Dias, P., Kanellopoulos, K., Medarac, H., Kapetaki, Z., Miranda Barbosa, E., Shortall, R., Czako, V., Telsnig, T., Vazquez Hernandez, C., Lacal Arantegui, R., Nijs, W., Gonzalez Aparicio, I., Trombetti, M., Mandras, G., Peteves, E. and Tzimas, E. (2018), EU coal regions: opportunities and challenges ahead, EUR 29292 EN, Publications Office of the European Union, Luxembourg, doi:10.2760/064809

²) Green, F. (2018), Transition policy for climate change mitigation: who, what, why and how, CCEP Working Paper 1807. Crawford School of Public Policy, The Australian National University

Want to know more?

Kristina Broens
Team Lead Knowledge Transfer
+49 30 302020126

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