How climate policy can be made socially just and enforceable worldwide
A model study now explores how carbon pricing with redistribution can help the energy transition and the climate worldwide, while increasing welfare and reducing economic inequality – which is important for enforceability.
According to the study, good results would be achieved by a globally uniform carbon price paired with moderate financial transfers to poorer countries, or by a carbon price differentiated by country with domestic revenue recycling. The study was co-authored by the Potsdam Institute for Climate Impact Research (PIK) and published in the top journal Proceedings of the National Academy of Sciences of the United States of America (PNAS).
“The damage caused by climate change and the costs of climate policy affect rich and poor differently, both internationally and nationally,” says Simon Feindt, PIK researcher and a co-author of the study. “If the burden falls disproportionately on the poor, this can reduce support for climate policy, which should be avoided. After all, carbon pricing generates funds that can be used to relieve the poorest.” Global calculation models for scientific policy evaluation have so far paid little attention to the effects of climate policy on the rich–poor divide at the country level. “Our work provides new insights here,” says Feindt. “It shows how climate and social policy can go hand in hand.”
The research team developed a novel integrated assessment model to map the relationships between the economy, income distribution and climate policy in 179 countries. They calculated several variants of a scenario in which governments worldwide combat global heating by means of carbon pricing, then distribute the revenues back to the population. This policy has three impacts on incomes: first, fossil fuels become more expensive; second, revenues are redistributed; third, climate damages are reduced in the longer term. The research team drew on a PIK study from 2020 to quantify these damages.
Focus on the poorer half of the population
The scenario variants differ in terms of whether the carbon price (i.e. how much more expensive fossil energy becomes) is globally uniform, or whether it is differentiated by country, and in the type of revenue redistribution (i.e. how households benefit from the carbon price). All variants show that carbon pricing consistent with limiting global heating to a maximum of 2°C above pre-industrial levels improves welfare, relative to a business-as-usual scenario without additional climate policy measures; the latter would see the Earth become 2.9°C hotter in 2100. For this assessment, the research team uses adjusted per-capita income, with a discount depending on the level of economic inequality.
According to the study, the welfare gain would be greatest under a rather unrealistic scenario: the world agrees on a globally uniform carbon price path, and the revenue is redistributed in globally uniform per-capita amounts. People in the poorest countries would benefit greatly from this – they emit less CO2 than people in the richest countries, so they pay less for carbon pricing but receive just as much money from the redistribution. However, the analysis shows that the poorer half of the populations in the richest countries would lose income under this scenario on average. In addition, an enormous amount of money would have to flow to the Global South, which could be difficult to enforce.
Mitigating the acceptance problem
Another variant therefore appears more advantageous, with the poorer half of the populations in each country worldwide gaining income. Here, too, there is a globally uniform carbon price path, but financial transfers to the poorest countries are limited to compensating them for climate “loss and damage”. The remainder of the revenue is redistributed at the national level via uniform per-capita transfers. The North–South transfers would then amount to around 100 billion dollars in 2030 and around 500 billion dollars in 2050, representing 5 and 15 percent of global carbon price revenues respectively. According to the study, a pragmatic alternative would also be economically viable: carbon pricing differentiated by country, combined with recycling of revenue at the national level.
“Since the 2013 World Climate Summit, international climate negotiations have included the principle that rich countries – which are primarily responsible for climate change – should compensate the Global South via a ,loss and damage’ mechanism,” explains lead author Marie Young-Brun (Halle Institute for Economic Research/University of Leipzig). “Our model calculations show that this mechanism is also an interesting point of reference for the redistribution of carbon price revenues. Improving the situation of the poorer half of the population, even in rich countries, could alleviate the problem of climate policy acceptance.”
