Politics, as well as economics, matter when making climate policy

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The writer is professor of the practice in the Department of Economics at Georgetown University and a nonresident fellow at Bruegel

Daily headlines documenting the accelerating pace of climate change remind us of the imperative of action to arrest the catastrophe being wreaked on our planet. The critical actors here are governments whose job it is to implement effective climate policies. Yet, despite the need for accelerated efforts, the hesitancy of politicians is remarkable.

This often reflects the political dimension of policymaking. In July, for instance, European parliament president Roberta Metsola urged lawmakers to refrain from crossing “an invisible line” between ambitious green policies and public support for the changes to people’s lives that these will require. She warned that if insufficient attention was paid to the economic and social impact of environmental policies, this could come back to bite politicians as they headed into next year’s elections to the parliament.

Political inaction often reflects the fear of being blamed by special interest groups for green policies that create economic hardship. Losses from addressing climate risk tend to be concentrated and immediate, while benefits are diffuse and lie a long way in the future. Opposition to net zero policies is mounting worldwide, mainly reflecting the massive distributional consequences of the phasing out of the fuel-driven car and traditional domestic heating systems.

Economists have long studied the status quo bias in policymaking, the hesitancy that worried Machiavelli when he warned about the perilousness of “tak[ing] the lead in the introduction of a new order of things”. In some recent work, my colleagues and I investigated the salience of status quo bias to the conduct of climate change policies (CCPs).

Do governments implementing such policies see an erosion in popular support? Is the fear of implementing them rational and is there a way to mitigate or overcome the political fallout?

Economists often subordinate political considerations to the altar of economic efficiency. They will advocate the efficient solution (in this case, taxing carbon), even if a small reduction in efficiency markedly increases the chance of political feasibility. Politicians may thus be more dismissive of economic policy advice that they regard as politically naive.

There are four lessons to draw here.

First, the hesitancy of governments over CCPs is rational. More stringent policies are strongly associated with lower popular support, at least on average across the different CCP instruments. So Machiavelli’s worry is an enduring one.

Second, the scale of the political hit depends on policy design. Market-based instruments (such as emission taxes) are entirely responsible for the damage to popular support; regulations, such as emission limits, seem far more innocuous from an electoral perspective.

Taxing carbon has long been economists’ preferred measure on efficiency grounds, but slightly less efficient instruments also merit consideration if the political economy is more favourable. Market-based measures, such as emission taxes, trading schemes and feed-in tariffs, and non-market measures, such as emission limits and research and development subsidies, have measurably different political impacts.

Third, the distributional consequences of CCPs loom large in the likely electoral effects. The economic burden they impose is concentrated among groups with less resilience, so redistributive instruments targeted to those who experience higher economic insecurity is of the essence.

When CCPs are implemented in environments in which economic inequality is rising, the political hit is very large. But when inequality is falling, the electoral impact is benign. Likewise, provision of social insurance against the effects of CCPs on certain groups is critical in reducing the political fallout. This should include direct transfers to households, unemployment benefits to workers who lose their jobs when companies and sectors shut down as a result of CCPs, and active labour market policies to reallocate workers to key sectors in the green transition.

Finally, the electoral cycle is important for the timing of all this. The damage is much larger when CCPs are enacted close to looming elections, and largely benign when introduced early in the cycle.

Climate change policymaking involves much more than choosing the most economically efficient measure, therefore. Economists need to take account of social and political dimensions in their recommendations, even if that comes at some small cost to economic efficiency. They must, in short, avoid letting the perfect be the enemy of the good.