A just transition

Only a just transition will achieve meaningful action on climate change.

  • Addressing climate change involves multiple approaches, including incentives, fiscal measures, and new and improved standards.
  • Mitigating climate change is an economic—and moral—imperative because the overall costs of unmitigated climate change to society far outweigh the costs of mitigation.
  • However, there are short-term costs, and we need to understand who those costs fall on versus who gains. Costs are always unwelcome, but we need to demonstrate the benefits, including energy security and new green jobs.
  • A just transition is essential to ensure widespread support and avoid delays that will simply result in greater climate change.
  • A just transition means fairness must be an integral part of the fiscal/policy response to climate change.
  • To gain acceptance, the proceeds of taxes/duties must be perceived as well spent to be popular, gaining political and social legitimacy.

It’s widely understood that climate change on the current trajectory would be economically devastating across society. Economists warn that 2˚C of warming by 2050 could result in a 2.5% to 7.5% reduction in global GDP, with the worst effects felt by countries in Africa and Asia. In the long run, the costs and devastating effects associated with adaptation to climate change are far greater than the costs of acting now to reduce the temperature rise. 

We know that climate change itself is likely to have the greatest impact on the poorest individuals, communities, and countries—those least able to mitigate its effects. We have evidence already: The COVID crisis has shown that extreme events disproportionately affect the poorer members of society and exacerbate preexisting income gaps within countries. So we must act, but how we do so will influence whether mitigation continues to have popular support.

Crucial to achieving consensus on climate change action is a fair and equitable approach to its implementation—a just transition that addresses the risk that the costs of addressing climate change fall disproportionately on those unable to afford it. Likewise, those who have worked hard in challenging conditions to extract fossil fuels need training and jobs in the new industries created by the transition to cleaner energy.

"The transition towards inclusive and low-carbon economies must be just and fair, maximizing opportunities for economic prosperity, social justice, rights and social protection for all, leaving no one behind."

UNFCC, April 21, 2020

Momentum is building among countries and businesses to implement initiatives designed to curb reliance on polluting through carbon pricing. In 2021 alone, 65 carbon pricing initiatives were selected by 45 national jurisdictions and 34 subnational jurisdictions, representing 11.65 GtCO2e, or 21.5% of global greenhouse gas (GHG) emissions. These costs threaten a near-term inflation pickup as businesses essentially pay to pollute or, alternatively, invest in the new technology required to avoid emitting GHG.

Carbon pricing approaches

ETS

 

Cap the total level of GHG permitted and allow lower-emitting industries in certain sectors to save, or sell, on any surplus allowance

 

Create a supply-and-demand dynamic for emissions allowances that allows emissions trading systems (ETS) to set a market price for GHG emissions

 

Governments decide emissions cap allowances across given industries or entire economies that typically decline over time

Carbon taxes

 

Define a taxation rate for GHG emissions or, more often, on the carbon content of fossil fuels (rather than on their emissions)

 

Aim to make individuals and companies pay the full social costs of their carbon pollution

 

 

Raise revenue that can be used to mitigate the effects of pollution

 

 

As the International Monetary Fund sharply cuts its growth forecast for 2022, with a warning that higher-than-expected inflation and the Omicron variant have worsened the outlook for the global economy, some politicians have started to attack these green taxes as inflation begins to bite in both developed and developing nations. In the United States, the Biden administration faced a watering down of its US$3.5 trillion social spending and climate bill, with some Democrats warning that the proposed US$555 billion earmarked for climate and clean energy investments could be reduced or scrapped.

Taxes on energy disproportionately affect the less wealthy, but it's crucial to achieving net zero that green taxes continue to incentivize a shift to sources of low emissions energy. In the long term, solving climate change can benefit society broadly and, more particularly, its poorest people, communities, and countries, but it’s vital that the proceeds of green taxes are clearly earmarked to show clear value to society and positive direct benefits in the short term.

What is a just transition?

At its core, the Paris Agreement recognised the importance of achieving “the imperatives of a just transition of the workforce and the creation of decent work and quality jobs in accordance with nationally defined development priorities." When tackling climate change, we also need to consider wider sustainable development goals, including reducing inequalities and offering decent work and affordable, clean energy. Broadly, when considering a just transition, we should be considering workers, supply chains, communities, and consumers, which are all affected by fiscal measures.

Why should we aim for a just transition?

1 For purely ethical reasons

2 To ensure the social legitimacy of the transition

3 To ensure the widest possible political acceptance and avoid protests and delays, along with their associated financial and environmental costs

"One of the major challenges in moving towards a low-carbon economy is enabling workers in declining industries to find new jobs and livelihoods."

UNFCC, April 21, 2020

Failing to properly transition jobs from high carbon to low carbon risks policy reversal if those who have worked hard in difficult conditions to extract fossil fuels (e.g., coal miners) fail to see real action to develop jobs in renewable industries in their areas.

There are a huge number of jobs forecast to be created by the transition—18 million jobs could be created by 2030 in pursuit of the Paris Agreement goals—but workers need to see real action to ensure that jobs in renewable industries are encouraged in their areas and know they’ll be qualified and trained for them.

There are overlaps in transferable skills between occupations in polluting and renewable energy industries: The skill set of electrical engineers employed in operating fossil fuel power stations can be adapted to renewable power plants and former shipyard workers could be successfully retrained to build offshore wind farms, as could displaced coal workers for the solar industry. Ambitious pilot projects have been launched to lure workers to relocate to far-flung green industrial megaprojects, but these industries (e.g., wind farms) may already lie in similar locations to existing, polluting industries (e.g., offshore oil rigs). More localised projects may help to convince workers that these new jobs really will be coming to their areas, often to the same industrial heartlands that will see polluting industries decline.

Two centuries of global energy sources

Global primary energy consumption by source (TWh)

Chart covering two hundred years of energy consumption by source, with traditional materials such as biomass and coal giving way to, for example, modern biofuels, solar, and wind.

Source: "Energy Transitions: Global and National Perspectives," Vaclav Smil, 2017; "Statistical Review of World Energy," BP, 2021. Retrieved from: 'https://ourworldindata.org/energy' [Online Resource]. TWh refers to terawatt hour. Primary energy is calculated based on the 'substitution method', which takes account of the inefficiencies in fossil fuel production by converting non-fossil energy into the energy inputs required if they had the same conversion losses as fossil fuels.

The UN’s just transition white paper suggests that companies, industries, and state or federal governments could establish and finance public retraining programmes to enable reskilling within the context of regional economic development strategies. Companies should identify their community engagement, especially in regions in which stranded asset risk is highest, and unions will need to ensure their members receive the training they need through the collective bargaining process. 

What’s amplifying the issue today?

Current inequalities are worsened by rising energy prices, a prime factor behind overall rising inflation in many countries. By nature, energy expenditure by households is fairly inelastic; generally, people need to heat their homes and reduce spending on other expenses. This is increasing pressure on politicians to find ways of reducing prices, and anything that’s perceived to increase costs, such as carbon taxes, is a potential target. This pressure is coming from not just the poorest segment of society but more broadly; those on middle incomes are also feeling an inflationary squeeze.

Rising energy prices are driving increases in the cost of living

HICP Index inflation rate in the euro area (%)

A line chart demonstrates recent steep inflation in the euro area's housing, electricity, and gas costs, as measured by the HICP Index.

Source: "Measuring inflation—the Harmonised Index of Consumer Prices (HICP)," ECB, January 2022. The inflation rate includes housing, electricity, and gas costs.

In a politically charged environment with substantial scrutiny, it's important to distinguish these near-term taxes—incentives to tackle climate change—from wild claims about the impact on consumers of other transition activities. For example, a recent report by the World Economic Forum identified a relatively low impact on costs in many industries of between 1% and 4%; however, with large numbers regularly cited and carbon taxes being easy to identify, it’s crucial that proponents of action are clear on costs and benefits.

A main driver of today's higher energy prices is geopolitical challenges; for example, the invasion of Ukraine is likely to result in disruption to energy supplies to Europe. In addition, to hit 2050's net-zero targets, energy systems are likely to require a global investment of US$5 trillion a year by the end of this decade. And as every industry is pushed to decarbonise—by governments, consumers, and shareholders—this green revolution might cause short-term costs that contribute to global inflation.

Meanwhile, climate change itself may be responsible for lessening the availability of some renewable energy sources. In 2021, the United Kingdom's renewable generation fell to its lowest level in four years, driven by a wind drought that saw wind generation drop by 30% year over year as wind speeds fell. Similarly, a megadrought in the U.S. southwest is drying up the potential of hydroelectric power generation from the Colorado River while also harming crops intended for biofuels.

Various studies have tried to analyse how this inflation rate is experienced by different levels of income. OECD research shows that low-income households spend a greater share of their income on rent and energy services, including electricity. Other studies in the United Kingdom  and Australia confirm near-term trends in rising nondiscretionary average prices that disproportionately affect those in the lowest income quartile.

Nondiscretionary price growth fell during the pandemic and has since risen sharply

CPIH, discretionary and nondiscretionary 12-month price growth, U.K., January 2017–November 2021 (%)

A line chart demonstrating that the United Kingdom's nondiscretionary spending fell sharply during the panedemic but has since risen sharply.

Source: "Inflation rates for discretionary and non-discretionary spending: December 2021," ONS, 2021. CPIH refers to the Consumer Prices Index including owner occupiers' housing costs.

Why stay the course?

Of course, we will all—especially the poorest in our communities—lose in the event of irreversible climate change. Ultimately, a transition to renewable energy helps everyone, especially those least able to afford mitigation measures (e.g., flood defences) and who are more likely to live in the most affected areas. But the gilets jaunes, or yellow vest, protests in France in 2018, sparked by hikes in gas and diesel taxes, serve to highlight that solutions to climate change that don't acknowledge the reality of economic inequality are perceived as both unfair and politically impractical. Those advocating for climate action in today’s political climate need to anticipate how opponents will portray their proposals and ensure that they’ll be seen as fair.

There are further risks of political instability in oil-producing countries that fail to adapt to the transition toward a low carbon economy. Analysts suggest that some countries, including Nigeria, Iraq, Algeria, and Chad, are vulnerable to "a slow-motion wave of political instability" as they battle "doom loops of shrinking hydrocarbon revenues, political turmoil, and failed attempts to revive flatlining non-oil sectors." Many countries will be too hampered by insufficient infrastructure, human capital, and economic and legal institutions to effect a smooth diversification away from fossil fuels.

These are significant known unknowns, but it's essential that the global climate change agenda stays the course. Already, the cost of renewables has been consistently falling, which will offer benefits across society as, for example, renewable generation sources begin to match fossil fuels on cost. By 2025, the U.K. government predicts that both wind and solar will offer approximately half the levelised cost of electricity generation as gas for new projects. We expect that we’ll eventually gain lower energy costs and an energy supply that is, by definition, renewable—not subject to limits in global supply—and that does not irreversibly damage the planet. 

What’s the right framework for change?

Green taxes, regulations, and tariffs are important components of the transition to clean energy, helping to correct market imbalances that can favour unsustainable fossil fuels. But we cannot ignore that the concept of taxation is unpopular in isolation, and it will be vital to clarify exactly what green taxes pay for to enable a discussion around what they’re intended to achieve. As proponents of action on climate change, we have a responsibility to ensure this message is well delivered and, for these programmes to be popular, we need comprehensive messaging about the tangible benefits resulting from the revenues raised.

Both institutional investors and shareholders can use their influence on global companies to ensure that just transition measures are in place, in consultation with workers, communities, and unions. And ESG-labeled bonds, including sovereign bonds linked to climate action, have seen a significant increase in issuance over the last couple of years. Additionally, building on the success of green bonds, social sovereign bonds direct funding towards projects with positive social outcomes, which can include training, education, and employment generation linked to climate change. Investor interest in these bonds has soared during the COVID-19 pandemic, as the market turns to sources of capital that deliver social benefits while funding recovery.

The issuance of green bonds hit record highs in 2021

Global climate bond initiatives

A bar chart demonstrating that the issuance of green bonds hit record highs in 2021.
Source: Climate Bonds Initiative. ABS refers to asset-backed securities. Values shown for 2021 are H1 2021.

Positive support from policymakers and investors points to real progress

Political support is growing: Forty-six countries have committed to the introduction of national planning to aid a just transition, and 161 investors, representing US$10.2 trillion in assets, have publicly stated their commitment to supporting the Principles for Responsible Investment’s (PRI’s) recommendations for investor action.

The PRI's five areas for investor action

 
1 Investment strategy—Assessing exposure to the social dimension (including employment impacts) of the transition, pursuing dialogue with workers and other key stakeholders, and integrating just transition factors into investment beliefs and policies
2 Corporate engagement—Including just transition factors in investor expectations, requesting disclosure, benchmarking performance, and pressing for improvement 
3 Capital allocation—Incorporating the social dimension into strategies for climate investment across all asset classes, including listed equities, bonds, private equity, and real assets
4 Policy advocacy and partnerships—Making the just transition a part of policy dialogue at subnational, national, and international levels as well as within place-based partnerships
5 Learning and transparency—Understanding emerging lessons and disclosing results so that the efficiency and effectiveness of action on the just transition improve
Source: Climate change and the just transition: a guide for investor action, PRI, December 10, 2018.

In June 2021, EU member states approved a €17.5 billion Just Transition Fund targeting support for regions and sectors most affected by the transition to the green economy, which is conditional on member states submitting territorial just transition plans.

Mitigating the devastating environmental and financial impact of climate change by moving to an environmentally sustainable economy is simply common sense. We must replace employment in polluting industries with new, high-quality jobs. We must incentivise investment and more sustainable practices while penalising pollution. We must set higher standards. Some of these come with short-run costs, and we must ensure we understand who pays and who gains and, in doing so, ensure that we demonstrate that we aim for a just transition. This is the crucial prerequisite for building and maintaining public support for transformational change.

“Saving our planet, lifting people out of poverty, advancing economic growth … these are one and the same fight.”

—Ban Ki-moon, Eighth Secretary-General of the United Nations

 

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