How Can We Design Environmentally Effective and Politically Appealing Carbon Pricing Policies?
Daniel Muth
Institute of World Economics, HUN-REN Centre for Economic and Regional Studies, Budapest (principal institution); Doctoral School of Political Science, Public Policy and International Relations, Central European University, Vienna; From 1st of April 2024, Institute for Environmental Studies, Vrije Universiteit Amsterdam
“Integrating social considerations into climate policy is crucial to adopt politically acceptable and environmentally effective measures”
As humanity battles for its existence on our small planet, scientists and environmentalists are staring at a horrible truth – the price for our survival now would seem to entail two things humans tend to resist above others: change and sacrifice. The potential of a carefully-designed carbon tax ‘solution’ is to package these two ‘enemies of man’— change and sacrifice—in a highly practical and appealing way that delivers considerable environmental results while best supporting those that sacrifice most.
In an ideal world, there would be no carbon pricing. As soon as more sustainable or cleaner energy options would pop into the picture, all of humanity would rush to do the best things for themselves, their children and the future. But in reality, our future often competes with various interests which generate compromises. Carbon pricing, which puts a fee on greenhouse gases emissions, is one of these necessary compromises. Albeit imperfect, successful carbon pricing policies, give us a chance to regain some environmental balance, buy some time, and be more humane. Any movement in this direction, especially from some of the world's most influential entities, could change the face of our future.
It is with this in mind that I turned to conducting my research. Political scientists, climate policy practitioners and international institutions have long been trying to find out how we can collectively ease the gridlock around implementing ambitious decarbonization measures and build long-lasting political momentum to address climate change. My research findings suggest that integrating social and economic considerations into climate policy design may help us rise to this challenge.
By now, economists and climate policy practitioners agree that carbon pricing should play a central role among policies used to tackle climate change effectively. However, in most countries that have adopted carbon pricing policies, the prevailing price levels are simply too low to accelerate decarbonization and drive down emissions. This deficiency can be attributed to numerous political economy constraints, but particularly to their so called, negative distributional effects. For instance, carbon taxes may disproportionately affect low-income households, thus exacerbating energy poverty issues and increasing income inequality in a country. Moreover, carbon pricing negatively affects domestic companies’ competitiveness, since they have to compete with international firms that do not pay for their environmental pollution during their production. These factors can lead to a negative public opinion of the measure, making it nearly impossible to introduce ambitious carbon prices.
My research delves into the literature to study how challenges in politics and the economy paralyze ambitious climate policies which are crucial for safeguarding the planet's boundaries. Specifically, I examine possible ways to overcome these constraints by focusing on the single most promising policy design element of carbon pricing: the generated revenue. This revenue can be redistributed back into society in different ways to collectively improve the political acceptability and environmental effectiveness of these policies.
Recent developments in the field, suggests that using the revenue from carbon pricing for specific social purposes, also known as revenue recycling, may dissolve the political impasse around ambitious climate policy. For instance, compensating negatively affected social groups can improve the public's perception on policy fairness. Further, investing in climate projects from carbon pricing proceeds, such as large-scale energy efficiency/renewable energy programs for the public and industries, can deliver crucial environmental benefits to society. In addition to reducing emissions, these types of programs highlight the effectiveness of a policy and may win public support for policy implementation.
In my paper, I performed a comprehensive comparison of thirty national-level policies of carbon pricing and analyzed which revenue recycling strategies are effective in supporting stringent carbon pricing and what distributional impact these policies have on different socioeconomic groups. As political economy circumstances vary greatly from country to country, (level of economic development, income inequality, fossil fuels dependence), their use of revenue must respond to individual local constraints and accommodate different social objectives. To give an example: the public may accept higher prices in countries that are more vulnerable to climate change, if the revenue is spent on climate adaptation projects. Alternately, in a socially polarized country, where many people suffer from energy poverty, compensation for poor households will be necessary to avoid equity issues and the political escalation of public discontent.
The salient conclusion stemming from my research is that a hybrid usage of carbon revenue, combining various compensatory schemes in conjunction with spending on climate projects (including making low-carbon alternatives available), is the most effective strategy for implementing stringent carbon policies. Crucially, this is true even in nations with greater fossil fuel dependence and more challenging political environments. Parallel to that, a complete lack of social compensation renders the introduction of ambitious carbon pricing implausible, even in some highly developed countries.
These findings have obvious and direct policy implications. On the scientific front, I provide substantial empirical evidence to support theoretical claims delineating the relationship between enhanced carbon price levels and effective redistribution of carbon funds. This may serve as a kind of directional map for policy makers about how these mechanisms should be designed to make them environmentally effective, socially tolerable, and politically acceptable. Because the majority of the countries in the world today are living in constrained political economy conditions, evidence-based guidance on how to implement higher carbon prices to meet their climate needs and ambitions may come at a crucial moment.
At this juncture, it seems quite hopeful that reinvesting tax revenue in people and the climate can win public support for even stringent carbon taxes. Providing exemptions to adversely affected social groups would compromise the environmental integrity of policy. Instead, the way the revenue is spent—amounting to 1-2% of GDP with a sufficiently high carbon price to align with the Paris Agreement's temperature targets—should assist affected groups by shielding them from negative effects and fostering the adoption of emission-reducing measures. If these expenditures from carbon revenue specifically target critical planetary boundaries, such as addressing issues like freshwater changes and land transformations, the policy will generate exponential environmental benefits. Past research indicates that these additional advantages from climate policy are well-received by the public, facilitating the implementation of even more robust policies due to increased public support.
For these reasons, I am deeply invested in research that equips policy makers with the data, proven strategies and vision needed to create, implement, and fast track policies in our race towards decarbonization. The most successful measures are those crafted with the best interests of the people at heart, and the sacrifice and change they entail can become our formidable tools for addressing the challenges posed by climate change.
