The political logic of just transition policies

Abstract

ABSTRACT A ‘just transition’ calls for compensations to fossil fuel workers whose jobs will be lost because of the clean energy transition. The ethical case for a just transition acknowledges the hardship of vulnerable workers. In contrast, I examine the political case for a just transition. The logic of such a case remains hazy and under-theorized. I draw on the insights of ultimatum games to understand the strategic dimension of the relation between governments and fossil fuel workers. In a successful just transition, the government compensates workers in exchange for their exit from the fossil fuel industry. This ensures a faster clean energy transition. Yet the prospects of such an agreement depend on several parameters: the quality of outside options available to workers, their cost of mobilization, and the climatic benefits that the government obtain from a fossil fuel phaseout. I show that a government's credibility is also critical. This theoretical exercise helps make sense of several otherwise puzzling patterns in just transition policies and offers guidance on critical policy issues. Key policy insights Just transition policies can break the carbon deadlock by incentivizing the exit of fossil fuel workers. The ability of the government to induce the exit of labour depends on climatic benefits, fossil fuel wages, outside option wages, and anti-government mobilization costs. Lack of government credibility, which can be caused by political risks, capacity constraints, or low trust, reduce the prospects of phaseouts and increase their cost. Unions play an ambiguous role: they increase wages and reduce mobilization costs, but can improve outside options, solve coordination failures, and reduce transaction costs. Fossil fuel firms can and do use financial and non-financial strategies to reduce the mobility of their workers.