Managing the distributional effects of climate policies: A narrow path to a just transition

Abstract

This paper revisits the debate on the distributional effects of climate policies and the just transition using a broader assessment framework than that of standard welfare analysis where multidimensionality, adjustment dynamics and multiple market failures are simultaneously considered. First, the paper highlights the importance of considering the heterogeneity in the capacity and willingness to adjust along three dimensions: time, space, and preferences. Distributional effects of a standalone climate policy are regressive on income and progressive on nonpecuniary benefits, becoming more regressive in the long-run and across regions. Second, using this framework, it compares the performance of five green policy packages including an offsetting policy (rebates, environmental tax reforms, green deal plans, place-based policies, progressive green subsidies). The policy analysis suggests that the path to a just transition, while achieving the desirable economic and environmental outcomes, is narrower than previously thought. While there is no policy package emerging as preferred, green deal plans appear the most sensible option also in terms political acceptability. Finally, considering the other causality nexus, from inequality to the support of green policy packages, helps explain the low political acceptability of climate policy in general.