Three ways policymakers can avoid the political risks of the green transition

Climate change is an existential threat to humanity. A growing majority of people worldwide agree that it must be addressed, according to a 2021 World Risk Poll published by UNESCO.

However, concrete policy proposals for “going green” are often subject to a series of mistakes that can ultimately slow progress on the transition.

But it doesn't have to be that way. By drawing on research like the Centre for Economic Policy Research's new eBook, policymakers can avoid three major pitfalls and forge a path toward the green transition. Here's how.

Communicating green policies based on monetary incentives has proven challenging and green taxes are often criticized as increasing inequality.

Strikingly though, the clever design of a green levy can ensure that poorer households face less of a fiscal burden and/or receive a greater share of the fiscal revenues. Thus, a carbon tax with a targeted redistribution of the ‘carbon dividend’ can fight climate change and inequality without raising the tax burden. The tricky part is communication.

It is not easy — yet it is crucial — to inform citizens in an easily understandable way that the environmentally conscious among them may actually receive much more in return than they contribute under a green tax.

When it comes to the international sharing of the cost of the green transition, it is essential that any solutions proposed are perceived as fair — even if this may, at times, come at the cost of efficiency.

Rapid price spikes of energy must be avoided. If climate action solely focuses on narrow initiatives, such as banning fossil fuel supply without addressing the issue of excessive energy demand, it could lead to unintended political consequences.

A contraction of supply with a stable demand leads to price spikes, making energy weigh heavily on people’s wallets. And this plays into the hand of climate-sceptic politicians: Accusing green measures and the green transition in general of raising price levels is trick 101 in the populists’ playbook when fishing for votes among the disenchanted. To avoid a backlash against the green transition, it is important to reduce the energy supply from fossil fuels while also reducing demand.

A carbon tax could be one solution. A carbon tax yields exactly the same environmental outcome and the same consumer loss as policies focusing on banning fossil fuels, but channels away the oil rents from shareholders into the coffers of the state. That fiscal boon can then be used for redistribution or other initiatives.

Another potential approach is to combine a ‘sobriety’ policy on the demand side with the original supply-side policy. Concretely, supply-side measures like closing gas power plants should be combined with demand-side measures, for example subsidising envelope renovations or communication fostering sobriety. In this way, not only does the supply curve shift to the left but also the demand curve, leading to an even bigger decrease in the consumption of dirty energy but without resulting in large short-run price spikes that are unpopular and play into the hands of climate change deniers.

A rapid stepping up of green energy supply will also play a key role in avoiding extreme (and unpopular) price spikes. This being said, it is important to recognize that in the short run there are certain constraints on the speed at which progress on the green transition can be made. For example, building new hydropower plants is a matter of several years rather than a few months. In the long run, however, the effect could more than compensate for the drop in dirty energy.

Another widely ignored aspect of our fatal fossil fuel addiction is its harmful political consequences, ranging from rampant corruption and mismanagement to domestic and international warfare. By getting unhooked from oil, gas and coal, we have the potential to make the world a safer and better-governed place.

Yet, we need to avoid replacing an oil curse by a mineral curse. Therefore, it is important to bet on decentralized green energy provision that creates local jobs and supports initiatives where a substantial part of the benefits go to local communities. In this way, corruption incentives are reduced and there is a lower potential for local popular backlash.

It is time to roll up our sleeves and convince a solid majority of people to engage in a set of far-reaching policies that could deliver real impact. The stakes could hardly be higher — a successful green energy transition will yield the double-dividend of not only saving the world from looming environmental disasters but also combatting toxic policies and reducing the risk of armed conflict around the globe.