Presentation from OECD Expert Workshop on Environmental Policies: Social and Economic Outcomes 23-24 June 2022

1. Managing the Distributional Effects of
Climate Policies: A Narrow Path to a
Just Transition
Francesco Vona (University of Milan, FEEM and
OFCE)
OECD, Expert Workshop on Environmental Policies,
June 24/06/2022

2. Regressive effects of climate policies over- or
under-stated?
• State of the art on multidimensional distributional effects of climate policies
(e.g., carbon taxes, cap&trade, green subsidies):
1. Effects are regressive on spending, but progressive on labor/capital income  the latter
more than offsets the former in most used CGE models.
2. Distributional effects are progressive in terms of health co-benefits, which are highly
persistent through intergenerational channels and human capital investments.
3. Green subsidies more regressive than carbon taxes; less clear the ranking between carbon
taxes, emission standards and cap-and-trade instruments.
4. Lump-sum redistributions and financing green projects more popular than environmental
tax reforms theoretically, all offsetting schemes work fixing regressivity.
• From a pure economic analysis of distributional effects, it is unclear why there is
widespread opposition to climate policies.
―Unless one does not believe that it is all about lack of international cooperation, lobbying and
misperception.

3. Three structural factors making things more
complicated and effects more regressive
1. Adjustment takes time and requires upfront invesments  regressivity increases in the long-term
―Obvious examples: upfront investments for clean energy equipment, home ownership for weatherization 
financial constrainats, for poor households green subdidy not enough (Borenstein and David, 2016).
―Less obvious examples: retraining invesments, environmental gentrification, housing prices, induced migration.
2. Spatial concentration of losers  spatial inequality are exacerbated
―Carbon-intensive industries are highly spatially concentrated: locational gini coeff. 0.72 for brown energy vs.
0.31 for green energy in the US (Popp et al., 2021).
―High-carbon regions often poorer than the average, lack diversification and exhibit a long-term declining trend
associated with automation and globalization (Rosés and Wolf, 2018; Weber, 2020).
3. Preferences and behaviours  environmental improvements value “less” for the poor
―WTP for environmental quality increases with income: value of environmental improvements lower for the
poor than for the rich (Greenstone and Jack, 2015; Banzhaf et al., 2019);
 This is not just about misperception, but it can be easily explained by non-homothetic preferences.
―Social interaction and spatial segregation amplifies the adjustment gap between rich and poor:
 Peer effects play a key role in the diffusion of green technologies, particularly for PV (Gillingham and Bollinger, 2020; Rode
and Müller, 2020).

4. Zoom-in 1: which labour market adjustment and
reallocation?
The adjustment is much less smooth than predicted by CGE models used to
evaluate distributional effects (an exception is Castellanos and Heutel, 2019):
• Capital better substitute for energy than labour  climate policy shocks
accelerates capital deepening (Marin and Vona, 2021).
• Green technologies are often biased against manual workers and in favour of
technical and engineering skills (Vona et al., 2018; Marin and Vona, 2019; Saussay
et al., 2022).
• Wage cuts associated with reallocation of labour from carbon-intensive/ high-
productivity/unionized manufacturing to low-productivity/ unregulated/low-
skilled service sectors.
―The lesson of the China shock and job polarization literature is pretty convincing on this
(Autor et al., 2006; Goos et al., 2009; Autor et al., 2013).
―Using these lessons, could we design policies to favour the reallocation of displaced workers to
low-carbon manufacturing production/high paid green jobs?
―But is there a wage premium in green jobs that would make this reallocation better?

5. Skill gaps larger than previously thought: low-carbon vs. generic
job ads in selected occupations (Saussay et al., 2022)

6. Is there a wage premium for low-carbon job offers?
(Saussay et al., 2022)

7. Is there a wage premium for STEM graduates in green
jobs? (Gregoire-Zawilski, Marin, Popp, Vona, in-progress)

8. Zoom-in 2: Is a green deal plan the silver bullet?
• Political acceptability of green deal plans is high, especially when they are
combined with explicit interventions on the labour market, such as minimum
wages and retraining (Bergquist et al., 2020)
• But how large are green fiscal multipliers? And who are winners and losers?
―Large multipliers  big fiscal push financially sustainable.
―Small multipliers  someone will need to pay for it: ex-post redistributional issues.
• Recent evaluation of the green ARRA package of Obama (Popp et al., 2021):
1. The green stimulus mostly effective in areas with a greater prevalence of green skills that
created 40% additional jobs than average communities.
 Retraining measures 18/858 (2.1%) measures under discussion in 45 countries (OECD dataset on green
fiscal policies)
2. Tension between two dimensions of inequality:
 Communities abundant of green skills are also wealthier  spatial inequality may increase
 Most job creation in manual jobs, especially in construction  offsetting other skill-biased
transformations, but no wage growth

9. Spatial distribution of fossil fuel employment
and green skill endowment (Popp et al., 2021)

10. Zoom-in 3: Is taming distributional effect of
climate policies enough?
• Level vs. induced change of inequality:
―First-order effect: lower inequality  wealthier median voter  more support for
stringent climate policies, at least in rich countries (Magnani, 2000; Vona and Patriarca,
2011)
Causal evidence: Bez et al. (2022) show that the China shock (which increased
inequality) reduced the support for green parties and green attitude towards climate
change in both Europe and the US
―Second-order effect: expected distributional effects of climate policies are proably small
compared to very large and unfair existing inequalities
• The big challenge: is the low-carbon transition feasible without reducing the level of inequality?
Reducing inequality and restoring a sense of fairness in the mission of public policy
essential to increase the political acceptability of climate policies  but this may be
unfeasible politically.
Focus on the issue of creating good green jobs, taking stock from recent findings on
the literature of place-based policies (Bartik, 2019) and policies to create “good
middle-skill jobs” (Rodrik and Stantcheva, 2019)  these strands highlight the
effectiveness of sector-specific training programs.

11. Some optimistic insights on the design of
good job policies for the green transition
From Popp et al. (2021) and an “hybernated” follow-up:
1. Skill distance between green and brown jobs relatively low  since
retraining costs are proportional to skill distance, large distributional
effects in the labour can be easily managed.
2. The main result of Popp et al. (2021), that is: the effect of a green
fiscal push is larger in communities with more green skills, holds also
for communities that invested more in training programs targeting
green jobs.

12. Thanks for your attention!
francesco.vona@unimi.it