A multi-model assessment of inequality and climate change

Economic inequality is a major global concern, intertwined with climate change mitigation and its impacts. The regressive effects of carbon taxes and higher energy prices, coupled with the social implications of climate policies, highlight this link. Existing research has explored the distributional effects of climate policies and impacts, showing that these disproportionately affect lower-income groups. However, redistribution of carbon revenues could mitigate these negative effects, increasing public support for climate action. The European Union's Social Climate Fund exemplifies this approach. While the impact on policy support may be less than theoretically predicted, such ‘climate dividends’ can significantly impact inequality and poverty. Public opinion on carbon tax redistribution is mixed, with strong support in middle-income, but less in high-income countries. International effort-sharing schemes could enhance redistribution to developing nations. Climate impacts also exacerbate inequality due to uneven distribution of risks. Recent studies demonstrate that climate change increases within-country inequality, particularly in low- and middle-income countries. Mainstream climate-economy models often neglect climate-inequality interlinkages; this study addresses this gap through a multi-model comparison, focusing on how climate impacts affect inequality, how climate policies influence income distribution, the role of redistributive policies, and the robustness of findings across models and countries.

A growing body of literature examines the distributional effects of climate policies and climate change impacts on poverty and inequality within and between countries. Studies consistently indicate that both climate policies and climate impacts disproportionately affect lower-income segments of the population. However, the literature also suggests that redistributing carbon market revenues can effectively offset the adverse effects of climate and energy policies on income distribution. Several studies have advocated for such redistribution to protect vulnerable populations from higher energy costs due to carbon pricing, aiming to improve public acceptance of climate policies. Empirical evidence on public support for redistribution, however, is mixed, with variations across income levels and countries. Despite the significance of the interplay between climate change and inequality, this connection is often missing from mainstream climate-economy models, a gap this study attempts to fill.

This study uses a multi-model ensemble of eight integrated assessment models (IAMs) representing four theoretical approaches: computable general equilibrium (CGE), detailed process-based (DP-IAM), cost-benefit (CB-IAM), and a macroeconometric-Keynesian model. Six scenarios were analyzed: a Reference case and a scenario compatible with the Paris Agreement's 650 GtCO₂ carbon budget. All models included persistent inequality in the Reference scenario. A uniform carbon price was implemented across sectors and countries, without international transfers. Two revenue-redistribution methods were explored: neutral recycling and equal per capita (EPC) distribution. Inequality in climate risks was incorporated through various impact specifications. The analysis focused on ten large countries, enabling uncertainty quantification through model agreement assessment. The diverse modeling approach addresses variations in decarbonization economics literature and provides insights into the effectiveness of compensatory policies.

The Reference scenario (without climate impacts) projects continued within-country inequality. Climate impacts in this scenario are projected to increase the Gini index by 1.4 points by 2100 (median across models). Paris Agreement-compliant scenarios, while leading to a modest, temporary increase in inequality initially (0.1 Gini points in 2030), show long-term inequality benefits from lower temperatures (0.4 Gini points increase by 2100 compared to a world without climate policies or impacts). CGE models show larger inequality increases, while DP-IAMs show smaller ones. The analysis found that climate policy costs are roughly proportional to income, but poorer countries can even experience progressive cost incidence. Redistributing carbon revenues equally per capita significantly reduces inequality, particularly in the short term (2.4 Gini points decrease in 2030). The effect is larger in developing countries. Over time, as carbon revenues decline, this benefit diminishes. GDP losses under the Reference scenario reach 4.9% by 2100. The Paris Agreement scenarios show GDP losses of 2-5% annually until 2050, lower than in the Reference. Redistribution has minimal macroeconomic impact, except in some cases with modified tax structures. Using equally distributed equivalent (EDE) welfare measure, which accounts for both GDP impacts and inequality, short-term welfare increases are observed due to redistribution (1.1% on average in 2030). Long-term welfare losses are still substantial under the Paris scenario, but significantly lower compared to the Reference.

The study's findings confirm concerns about the regressivity of carbon taxes but demonstrate that well-designed policies and the redistribution of carbon revenues can mitigate these effects. The substantial short-term inequality reductions from EPC redistribution highlight the importance of such policies for achieving climate goals while promoting economic inclusion. The long-term effects of redistribution diminish as carbon revenues decrease, emphasizing the need for sustained redistributive mechanisms beyond carbon pricing. While GDP losses are significant under climate policies, the findings reveal that the welfare losses are significantly lower than in the Reference scenario without climate policy. The welfare metric incorporates both economic efficiency and equity, providing a more comprehensive evaluation.

This multi-model assessment provides robust evidence that climate impacts exacerbate inequality, but that well-designed climate policies, coupled with effective revenue redistribution mechanisms, can mitigate these effects and even promote greater equity. The study emphasizes the importance of considering distributional implications in climate policy design and the potential of revenue recycling to foster social acceptance and achieve climate objectives. Future research should focus on exploring the long-term sustainability of redistributive measures and examining the impacts of different revenue recycling schemes on various aspects of societal well-being.

The study focuses on ten large countries, limiting generalizability to other regions. The model ensemble, while diverse, represents a selection of existing IAMs and may not fully capture the spectrum of possible economic outcomes. The assumption of a uniform global carbon price simplifies the complexity of real-world climate policy implementations. The choice of a specific inequality aversion parameter in the welfare analysis influences the results. Further research should explore sensitivity to different parameters and model specifications.