Developing countries exploring pathways to climate compatibility

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Climate mitigation and the fight against poverty and inequality

In designing climate mitigation strategies, one has to think hard about their impact on poverty and inequality. While it is often assumed that climate mitigation strategies are also pro-poor strategies, this is not necessarily so. This blog sets out some frameworks through which we can think through these issues and suggests areas where much more research and thinking is required. The ideal end-state is to understand more effectively the causes of poverty and inequality and the role that carbon emissions and climate change plays in this cycle. We know much less than we think we know.

The first, and most obvious framework, is that climate change will either negatively affect the poor or will make it harder for governments to tackle poverty and inequality. This is an easy argument to make because the poor are more vulnerable, live in vulnerable regions, their lives are more sensitive to climatic shocks and/or the infrastructure that they rely on is less resilient. So climate change will be bad for the poor, partly because it impacts them directly and partly because they have less institutional ability (such as through insurance markets or savings) to cushion against shocks such as adverse weather or even long-term changes to the climate.

It is also true that most poor people either directly rely on food production (through subsistence farming) or spend a disproportionately large share of their income on food and hence are likely to be more affected by extreme climate events that impact on food production and prices.

If we assume that in general climate change will impact the poor more, then it follows that in general, climate mitigation will benefit the poor in the long term, through mitigating or reducing the severity of shocks. One should take a long-term perspective, looking at forecasts 50 or even 100 years out.

The second and third frameworks are a bit more complex and deal with distributional issues. It looks at who uses fossil fuels, who benefits from fossil fuel usage and who benefits more from fossil fuel usage. My assumption is that fossil fuels are used more by the rich. To go further, a Lorenz curve of fossil fuel usage will be steeper than a Lorenz curve of income. In other words, if the richest 20% earn 60% of national income, then they probably use (directly and indirectly) more than 60% of fossil fuels. I know this to be the case in South Africa. The richest 20% earn 70% of national income but use more than 70% of fossil fuels (or more directly, emit more than 70% of the carbon dioxide). This can and should be tested.

From a static point of view, by simply pricing carbon adequately to capture the full cost of the externality, the rich should be paying more than 70% and so in a static sense, carbon mitigation measures should be positive for income distribution. Assuming that the tax revenue from a full and complete carbon tax is distributed equally to all citizens, then carbon mitigation should have a positive effect on both poverty and inequality, assuming of course that the consumption curve is broadly linear.

The third framework is a more complex human capital framework. Value can be added by using several resources: land, water, fossil fuels, capital, machines or brain power. If we change the relative price of these things, we benefit those who use more of the other things. Assume two firms, one that produces widgets from a machine that uses electricity and they make R100 in profit. The second firm grows apples (in a rain-fed organic garden using no fossil fuels) and makes R100 in profit. A change in relative prices (in this case one that taxes the electricity) will make the farm growing apples more profitable in a relative sense. So carbon mitigation measures will affect relative prices, benefiting some sectors of the economy at the expense of others. Who wins and who loses in this change? Research is needed to work out the distributional effects of policy change.

My hunch is that increasing the relative price of carbon would have two main effects. Firstly, it should help make menial labour more productive than capital equipment. This should or could be positive for employment and for low-skilled employment. The second effect is that it would raise the productivity of knowledge workers relative to people who use machines. Someone who derives their economic value added from brain power should score in a world where the price of carbon is rising (since carbon is mainly used in industries that use machines). Knowledge workers also commute less. This second effect could be quite regressive in that the world has already seen rising returns to skilled labour spurring a rise in inequality and climate mitigation effects might just accelerate this trend. Those with skills will do better than ever before, which might not be good for the poor.

These two effects, supporting labour intensive or menial labour industries and supporting knowledge industries will not offset each other. My hunch is that the second effect would dominate, but this is just a hunch. This implies that climate mitigation might make inequality worse at both an international level and at a national level. I think of Sweden, which appears to produce nothing physical but a large amount of skilled-enabled services. In this zero carbon world, Sweden wins.

Lastly, one can model an economy at full employment with lots of fossil fuel use and you can model an economy with zero carbon use at full employment too. What is the transition path? In the transition, capital moves from one sector to the other. Workers lose their jobs. They might be absorbed elsewhere, but they might not be. This phenomenon is also global.

Let’s simplify the story. A smelter uses 2% of the country’s electricity employing just 834 people. Let’s close the factory down and give the electricity to a small town in South Africa. Port Elizabeth uses about 2% of the country’s electricity and employs about 200 000 people in small businesses. Will the same people retrenched from the smelter get jobs in a small business in Port Elizabeth? Not immediately. The transition path might be quite complex. Workers lose their jobs in period one. Demand for labour from small firms in Port Elizabeth rise in period two. Salaries rise first, benefiting incumbents in period three. Some former smelter workers get some skills or their children get some skills and enter the job market, getting jobs and pushing wages back down to equilibrium in period four.

These changes might be quite traumatic for some workers, even if in the long term everyone is happy. This is a genuine concern because the mining industry and some heavy manufacturing industries are the last vestiges of unskilled labour in South Africa. Kill them (the industries) before their children get the skills to work elsewhere and you have a disaster on your hands, given our high rate of unskilled unemployment. So think through the transition path and the distributional impacts of this transition path.

It is assumed that climate mitigations strategies are always pro-poor. This might be the case, but it might also turn out that in a zero-carbon world, those who already have high-quality education benefit more. Climate mitigation strategies have to factor in these issues if we are to succeed in finding complementarities between environmental activism and inclusive economic development.

Kuben Naidoo is  Adviser to the Governor of the South African Reserve Bank.

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