Beyond carbon price tags: Achieving climate justice in the EU

As climate policies evolve, so too must their approach to equity: a just and equal transition is “probably the only one that’s feasible”, explains Matthias Weitzel, researcher at the European Commission's Joint Research Centre. Navigating the complexities of EU climate policies, such as the balance between regulatory standards and carbon pricing, is crucial to ensure fairness and equity across society.

The impact of climate policies on citizens varies not only according to income and other types of vulnerabilities but also household consumption patterns – notably regarding essential goods like food and energy, on which lower-income households spend a greater share of their income. Climate policy and its implications for equity and effectiveness take center stage in this interview with Matthias Weitzel, researcher at the European Commission’s Joint Research Centre (JRC). Delving into the intricate landscape of climate policies in the European Union (EU), Weitzel provides valuable insight into how regulations and policies help achieve ambitious climate targets. Drawing on his recent research paper “Prices and Standards for Vertical and Horizontal Equity in Climate Policy,” published on SSRN, Weitzel offers nuanced perspectives on the challenges and opportunities inherent in crafting equitable and effective climate policies.

What is the role of regulations and policies, particularly at the European level, in achieving climate targets such as the 1.5˚C goal in a fair and rapid way?

When examining climate policies, it becomes evident that they impact different segments of the population in different ways. This discrepancy arises from differences in household consumption patterns, particularly concerning essential goods such as food and energy, where lower-income households allocate a higher proportion of their income compared to wealthier households. In this context, implementing a carbon price to raise the cost of fossil-fuel based energy would disproportionately affect poorer households, exacerbating inequality and rendering the policy regressive. However, alternative strategies, such as regulatory measures, offer viable pathways to achieve climate targets while mitigating distributional disparities.

In the EU, existing regulations on vehicle emissions, building standards, and energy efficiency exemplify this approach. These regulations can set specific criteria for market products, fostering cleaner energy usage, and subsequently reducing emissions. Unlike carbon pricing, regulatory measures do not directly inflate energy prices. Nevertheless, transitioning to more efficient appliances may entail higher upfront costs, affecting prices for housing and consumer goods. Thus, while regulatory policies offer a distinct avenue for emission reduction, they introduce alternative economic considerations compared to carbon pricing.

What are the implications of policy packages on mitigation efforts?

The consequences of policy packages on mitigation efforts are multifaceted and warrant careful consideration. Different policy options entail distinct approaches to addressing potential negative effects, underscoring the importance of comprehensive policy frameworks, or packages. For instance, implementing a carbon price would elevate the price of fossil-fuel based energy, yet at the same time generate government revenue from carbon pricing. These revenues can mitigate adverse impacts by redistributing them to households. Even a straightforward redistribution scheme, such as providing equal amounts to each household, can yield benefits for lower-income households as the allocated sum represents a larger proportion of their total income. Consequently, this redistribution mechanism serves to counteract the regressive nature of carbon pricing policies, potentially offering tangible benefits to economically disadvantaged households.

How would you propose a fair and equitable approach to implementing carbon pricing?

A combination of carbon pricing and non-pricing strategies is the way forward. Choosing an approach to carbon pricing depends largely on societal preferences, particularly regarding inequality. It’s important to note that carbon prices not only impact lower-income households disproportionately but also vary within income groups. For instance, differences in location and housing conditions can significantly influence how households are affected. Urban dwellers may have easier access to their workplace, while rural residents may face longer commutes. Similarly, households in newer, more energy-efficient buildings fare differently than those in older structures.

Implementing a carbon price alone would require relatively high rates to achieve climate targets and therefore can have a significant impact on households that are faced with longer commutes or live in energy inefficient buildings. However, coupling carbon pricing with regulatory standards can mitigate these disparities. By setting standards alongside carbon pricing, we can achieve the same climate policy targets without imposing very high carbon prices, thus avoiding disproportionate impacts on different households. In addition, regulatory measures like standards can be useful where market failures exist and carbon pricing alone may not provide sufficient incentives to reduce emissions – for example, when the type of heating or the level of energy efficiency is chosen by a landlord, a tenant may not be able to substantially influence emissions.

How is this translated in terms of modeling?

We have incorporated two datasets – a household budget survey and an income survey – in our economic model. Typically, economic models operate with a single household, which obviously isn’t sufficient to understand how policies affect different households. With our dataset of approximately 200,000 households in Europe, we have ample observations to analyze how various policies impact different types of households. We can assess consumption patterns across income distribution and within groups of households with similar incomes but different consumption habits.

For example, even among households within the middle-income bracket, there are significant variations in energy expenditure for heating and transportation. Factors such as building types, urban layouts, and commuting distances contribute to these differences.

How can these findings affect policy instrument choices and guide strategies towards achieving equality?

What we have observed in Europe is that climate policies, or any measures aimed at reducing emissions, can have unintended consequences if they are not carefully crafted or communicated effectively. Take, for instance, the yellow vest movement in France, sparked by proposed fuel tax hikes, which are somehow akin to carbon pricing. This resulted in widespread protests. Similarly, in Germany, there were demonstrations against a proposed law to ban certain types of fossil boilers for heating. Such actions can provoke significant unrest within communities.

In this context, the European Commission’s former Executive Vice-President for the Green Deal, Frans Timmermans, emphasized the need for a just transition. Without it, he said, achieving any transition would become challenging due to public resistance. Therefore, to ensure successful transition, policymakers must design policies that avoid disproportionately impacting certain segments of the population. Otherwise, they risk public backlash, making the policies impossible to implement.

What policy options are available at the European level, and what direction should be taken moving forward?

The choice of policy options depends significantly on the level of inequality deemed acceptable or tolerable by governments and society. Currently, climate policies operate using a combination of regulations and carbon pricing, albeit with some constraints on the latter. However, this hybrid approach allows for mitigating the potential regressive impacts of carbon pricing. One strategy involves using revenues from carbon pricing to support the most affected households, and the EU has already put in place instruments like the Just Transition Fund and the Social Climate Fund for this purpose. This could involve direct transfers to households or funding schemes to support initiatives like transportation decarbonisation or building renovations. By improving household energy efficiency or transitioning to cleaner transportation, individuals can reduce their dependence on carbon-intensive activities, thereby lessening the impact of carbon pricing. 

Despite overall public support for addressing climate change, the support could dwindle if policy measures put a disproportionate burden on certain segments of the population. Therefore, ensuring fairness and equity in policy implementation is crucial to maintaining public backing for climate action.

Do within-group differences influence EU policy choices?

Most studies have traditionally focused on vertical equity, comparing the impacts of policies on rich and poor households. It is widely understood that implementing a carbon price would disproportionately affect poorer households due to their higher energy expenditures. However, research has shown that redistributing carbon revenues can help alleviate these effects, particularly for the most economically vulnerable households.

Our research delves deeper by examining horizontal equity, which looks within income groups to identify disparities. By analyzing household budgets across various European countries, we shed light on the heterogeneity within income categories. This nuanced understanding is crucial for designing effective policy instruments like the Social Climate Fund in the EU, which aims to mitigate the adverse effects of carbon pricing on society.

Rather than simply categorizing households as rich or poor, it’s essential to consider other dimensions of vulnerability to ensure policies are equitable and inclusive.

What are the current challenges and areas where improvement is needed in this direction?

The key is to identify groups most affected by climate impacts and devise explicit strategies to address them. For instance, the establishment of the Social Climate Fund illustrates a step in this direction, drawing upon research efforts such as those conducted by the Joint Research Centre. When the European Commission proposed extending the Emission Trading System (ETS) to encompass buildings and transport, it recognized the necessity for complementary measures to mitigate potential adverse distributional impacts. Therefore, there is a clear need to continue refining our understanding of these challenges and implementing targeted interventions that effectively balance climate goals with equitable outcomes.

Is the EU approach focused on setting standards or implementing carbon pricing?

The current policy framework in the EU encompasses elements of both standards and carbon pricing. Historically, emission pricing primarily targeted industries and electricity generation, excluding emissions directly resulting from household activities like heating or transportation.

However, with the revision of the Emission Trading System to meet climate targets for 2030, significant changes are underway. The extension of the ETS will encompass buildings and transportation, ensuring that emissions from activities such as driving and home heating are subject to carbon pricing. While standards have traditionally been prominent in this domain, some countries have already adopted carbon pricing mechanisms. Research informs the development and implementation of initiatives like the Social Climate Fund, aimed at mitigating negative social implications. The successful implementation of the legislative measures proposed by the EU will be pivotal in achieving the 2030 targets, marking a crucial phase in the policy’s execution.

The immediate priority at the policy level revolves around designing national plans to use funds from the Social Climate Fund effectively. With the forthcoming implementation of the ETS extension, which will elevate costs for purchasing gasoline and heating fossil fuels, strategic allocation of these funds becomes paramount.

How important is it to ensure a just and equal transition?

Pursuing a just transition is not only desirable but also probably the only one that’s feasible. Failing to prioritize equity in the transition process risks generating significant backlash and resistance. Striking a balance ensures smoother implementation and reduces the likelihood of falling short of ambitious targets, which, as models show, would require even more challenging future policy interventions.

Picture by Andrew Ridley on Unsplash

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