Managing the Political Economy of Climate Change Policies
IMF Blog, August 5, 2021
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Bibliographic details
- Authors: Davide Furceri, Jonathan D Ostry
- Published: August 5, 2021
Key empirical findings
- Climate change policies—especially market-based measures such as a carbon tax on fossil fuels—are likely to face opposition from:
- energy-using industries, and
- the public at large.
- Political costs of mitigation policies depend critically on income inequality:
- Political costs are negligible when income inequality is held in check, either:
- through the design of the mitigation policies themselves, or
- because of adoption of complementary policies that protect the poor and allow them to bounce back from short-term dislocations inflicted by higher carbon prices.
- When inequality increases, the results suggest political costs will tend to be high.
- Social protection and labor market policies matter:
- Political costs are muted when social safety nets are expanded to provide insurance against lay-off risks.
- Political costs are muted when active labor market policies are expanded to give displaced workers a fair shot.
- Energy price environment matters:
- Advancing mitigation policies in times of low oil prices is beneficial because people will suffer less from higher carbon prices when energy is cheap.
- Industrial structure matters:
- Economies with a large industrial base reliant on dirty energy (like coal) inputs will be more challenged in building support for mitigation and are likely to suffer more negative political impact.
- Diversifying the industrial base may help facilitate climate mitigation policies.
- Policy instrument acceptability:
- Non-market-based instruments—such as emission limits on power plants and public subsidies and investments in research and development—tend to be more palatable to electorates, even if they are second-best from an economic efficiency standpoint, provided they come with a transparent analysis of the costs and benefits.
Policy recommendations and strategic implications
- Design mitigation policies with political economy dimensions in mind to minimize or eliminate political costs.
- Protect vulnerable households who may lose out in the short term from the transition to a greener economy, for instance by:
- targeting social protection to the poor, and
- supporting workers whose jobs are threatened through insurance and active labor market policies.
- Sequence and time policy implementation to take advantage of periods of low oil prices when possible.
- Consider industrial diversification strategies to reduce reliance on dirty-energy-intensive sectors.
- When politically constrained, deploy non-market-based instruments coupled with transparent cost–benefit analysis to increase public acceptance.
Overarching conclusion
- Climate change will remain the defining global challenge of our age; environmental legislation requires public support to be viable. This research identifies lessons to help build such support and use the current crisis as an opportunity to advance low-carbon and climate-resilient economic growth.
Source: Managing the Political Economy of Climate Change Policies, Davide Furceri and Jonathan D. Ostry, August 5, 2021.