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Design of climate change policies needs to internalise political realities

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Davide Furceri, Michael Ganslmeier, Jonathan D. Ostry 07 September 2021 There are few issues that have sparked more attention across the globe than how to avoid the environmental and human catastrophe that climate change is inflicting on our planet. There has been unprecedented advocacy to pursue far-reaching climate changes policies (CCPs). But even in the wake of massive public protests and an ambitious agenda since the 2015 Paris Agreement, the hesitancy of politicians is remarkable.  From a theoretical perspective, there are two key factors that may provide an explanation for the slow reform progress on environmental issues. On the one hand, passing far-reaching CCPs often comes with distributional consequences: since CCPs limit economic activity in

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Davide Furceri, Michael Ganslmeier, Jonathan D. Ostry 07 September 2021

There are few issues that have sparked more attention across the globe than how to avoid the environmental and human catastrophe that climate change is inflicting on our planet. There has been unprecedented advocacy to pursue far-reaching climate changes policies (CCPs). But even in the wake of massive public protests and an ambitious agenda since the 2015 Paris Agreement, the hesitancy of politicians is remarkable. 

From a theoretical perspective, there are two key factors that may provide an explanation for the slow reform progress on environmental issues. On the one hand, passing far-reaching CCPs often comes with distributional consequences: since CCPs limit economic activity in specific industries, the costs tend to be concentrated on a few stakeholders, while the benefits from climate protection are distributed widely across the entire population (Stokes 2016, Tvinnereim and Iversflaten 2016). On the other hand, pricing the externalities of carbon emission would affect primary products (energy, fuel, etc.) – which loom large in the budgets of poor households (Metcalf 2009, Habla and Roeder 2017, Goulder et al. 2019). 

In our analysis (Furceri et al. 2021), we aim to assess the relevance of these hypotheses. To do so, we combine indicators of environmental policy stringency (EPS) from the OECD (Botta and Koźluk 2014) with measures of popular support for government in 31 countries between 2001 and 2015. The EPS database provides detailed sub-indices of environmental legislation across energy sources and instruments and coverage spans a large number of countries and years. In total, the countries in our sample are responsible for 43% of global carbon emissions (Muntean et al. 2018). As our main dependent variable, we use a poll-based indicator of the popularity of governments constructed by the International Country Risk Guide (ICRG 2020).

Climate change policies may incur political costs

CCPs seemingly do engender statistically significant political costs. A government moving from the first to the third quartile of the EPS distribution will experience – on average – a 10% decline in popular support (Figure 1). The effect is equivalent to a decline in vote share of about 11.17% during election years. These results are robust to various sensitivity checks. In addition, we use an instrumental variable (IV) approach to estimate the causal effect of CCPs on popular support for a government. Our instrument interacts a time-varying global term capturing ‘pressure’ for climate change policies (the occurrence of global extreme weather events) and a country-specific term capturing the vulnerability of a country to climate change (such as the length of its coastline which gauges vulnerability to rising sea levels).

Figure 1 The effect of climate change policies (change) on governmental popular support (left axis) and vote share in election years (right axis)

Design of climate change policies needs to internalise political realities

Note: A coefficient of -0.2 is equivalent to a 10% decline in popular support from an increase in EPS from the 1st to the 3rd quartile of the EPS distribution. Both coefficients are statistically significant (at least) at the 10% level.

Strategic timing and complementary social insurance mitigate the political costs of CCPs

Policy design – in terms of timing and complementary reforms – can mitigate the political costs of CCPs. First, governments can build support for advancing mitigation policies in times of low oil and gasoline prices, since electorates suffer less from higher carbon prices when energy is cheap (Figure 2). Indeed, as our results show, the effect of changes in EPS is only significant when oil and/or gasoline prices are at high levels, but indistinguishable from zero otherwise. Second, economies with a large industrial base reliant on dirty-energy (coal) inputs are more challenged in building support for mitigation and suffer greater political costs when adopting such measures (Figure 2). Diversifying the industrial base ex ante may reduce political opposition to CCPs. 

Third, the distributional consequences of CCPs loom large in determining political feasibility. When inequality – measured by the (pre- or post-tax) GINI or different percentiles along the income distribution – is high, the effect of CCPs on popular support is substantial (Figure 2). On the other hand, we do not find a significant cost when inequality is low. Our results show that taking complementary measures in terms of social insurance provision may succeed in limiting the political backlash against CCPs (Figure 2). The dividend from greater protection against labour market risks underscores the importance of active labour market policies and/or unemployment benefits as essential complementary policies to CCPs. Internalising the distributional side-effects of CCPs seems critical in developing politically achievable strategies for averting climate change.

Figure 2 Low oil prices and expanding social insurance can mitigate the political costs of climate change policies 

Design of climate change policies needs to internalise political realities

Notes: A coefficient of -0.2 is equivalent to a 10% decline in popular support from an increase in EPS from the 1st to the 3rd quartile of the EPS distribution. Bars denote the effect of climate change policies (change) interacted with different mediating factors on governmental popular support. Dark (light) blue indicates that effects are (not) statistically significant at the 10% level.

Emission limits are politically more feasible than carbon taxes

We also find large heterogeneity of political costs across different policy instruments. Our findings indicate that market-based measures such as taxation led to significant decreases in governmental support (Figure 3). However, we do not find significant costs when governments use non-market-based measures such as emission limits. This finding strikes us as central as it underscores that non-market-based measures could be an important alternative that is politically viable – despite lower efficacy of non-market measures in reducing carbon emissions compared to tax-based instruments.

Figure 3 Only market-based climate change policies lead to a decline in popular support for the government 

Design of climate change policies needs to internalise political realities

Notes: Bars denote the effect of climate change policies (change) of different instruments on governmental popular support. A coefficient of -0.2 is equivalent to a 10% decline in popular support from an increase in EPS from the 1st to the 3rd quartile of the EPS distribution. Dark (light) blue indicates that effects are (not) statistically significant at the 10% level.

Three lessons to escape the political dilemma of inaction

Climate change will remain the defining global challenge for decades to come. As with all policies that generate winners and losers, environmental legislation requires political support to be viable. Rational governments will continue to hesitate as long as political damage is palpable. Our research identifies key lessons to overcome this political dilemma and use the current crisis as an opportunity to advance low-carbon and climate-resilient economic growth. First, adopting stricter environmental policies in times of low oil prices can help to underpin popular support for mitigation. Second, providing social insurance for those adversely affected by climate mitigation can help to give those who are vulnerable to the transition to a greener economy the wherewithal to bounce back, and thus give governments the political backing to advance a greener policy agenda. Finally, adopting non-market-based measures such as emission limits or feebates can be a politically viable alternative to market-based emissions pricing, provided that they come with a transparent analysis of the costs and benefits.

References

Botta, E and T Koźluk (2014), "Measuring environmental policy stringency in OECD countries".

Furceri, D, M Ganslmeier and J D Ostry (2021), “Are Climate Change Policies Politically Costly?”, CEPR Discussion Paper 16273.

Goulder, L H, M A Hafstead, G Kim and X Long (2019), “Impacts of a carbon tax across US household income groups: What are the equity-efficiency trade-offs?”, Journal of Public Economics 175: 44-64.

Habla, W and K Roeder (2017), “The political economy of mitigation and adaptation”, European Economic Review 92: 239-257.

ICRG (2020), "International Country Risk Guide (ICRG) Researchers Dataset".

Metcalf, G E (2009), “Designing a carbon tax to reduce US greenhouse gas emissions”, Review of Environmental Economics and Policy 3(1): 63-83.

Muntean, M, D Guizzardi, E Schaaf, M Crippa, E Solazzo, J Olivier and E Vignati (2018), “Fossil CO2 emissions of all world countries”, Publications Office of the European Union.

Stokes, L C (2016), “Electoral backlash against climate policy: A natural experiment on retrospective voting and local resistance to public policy”, American Journal of Political Science 60(4): 958-974.

Tvinnereim, E and E Ivarsflaten (2016), “Fossil fuels, employment, and support for climate policies”, Energy Policy 96: 364-371.

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