Technical Note 7: Distributional impacts of long-term climate policies

In light of the IPCC report on Global Warming of 1.5°C and using the targets of the Paris Agreement as a common point of reference, there is a clear need to accelerate policy efforts leading to reduction of greenhouse gas emissions. Their successful implementation, however, requires social acceptance, which, in turn, is dependent on distributional impacts that climate action may have on different types of economic actors, sectors and geographies. The aim of this note is to present the drivers of the transition costs as well as available analytical tools and approaches that enable the quantification of the distributional effects of the long-term climate policies.

The assessment of long-term low-emission strategies should cover not only the impacts of transition on sectoral indicators and macroeconomic aggregates, but also address the question how the costs and benefits of climate action are distributed throughout the economy and society. Such assessment should also support the identification of suitable approaches to mitigate or minimise the negative consequences that could translate into increased social inequalities and poverty.

The choice of policy tool in a given sectoral and national context together with appropriately designed revenue recycling scheme determine the scale and type of associated distributional effects. The recently published meta-analysis of 53 national evaluations of climate policy impacts concluded that more than a third of the assessed effects are progressive or proportional – i.e. the burdens associated with a given policy instrument are either greater for wealthier actors or distributed equally across the income distributions (Ohlendorf et al. 2018).

However, among the available studies, there is currently very little focus on the evaluation of the distributional effects of climate policies in the long-term perspective. These are rarely included in the analysis of the macroeconomic consequences of the changes in prices and assets productivity that are being covered by the global models that address the interactions between the socio-economic and environmental realms.