Opinion & Analysis

Climate policies carry political costs, but those costs can be mitigated

The global agreement to move away from coal, oil and natural gas, reached at the December 2023 COP28 climate summit in Dubai, exceeded the expectations of some, but was seen by others as a compromise that fell short of phasing out fossil fuels entirely. Nevertheless, it is a small step towards the ultimate goal of reducing reliance on fossil fuels in reality. Progress will now depend on policies adopted by countries and on the decisions of households and firms in response to new incentive structures.

Perhaps the greatest roadblock to a greener future is the hesitancy of politicians to implement such policies and structures, which should ideally alter incentives away from fossil fuels quickly and fundamentally. Politicians hesitate to act on the grounds of economic efficiency alone, even though median voters in many countries have become greener over time and support for ambitious climate-change policies remains strong among the electorate (Van der Duin et al, 2023).

But such support is far from unconditional and depends on the changes to people’s lives climate policies will require. For politicians, the concern is that insufficient attention paid to the economic and social impact of environmental policies will hurt them in the run-up to elections.

Politicians’ fears have a rational basis in terms of possible blame for the collateral effects of green policies that may create economic hardship. Such losses may be immediate, visible and concentrated, while the benefits of climate policy may be diffuse and postponed, and perhaps even invisible to voters (since they amount to the prevention of environmental damage). Distributional consequences associated with the phasing out of combustion-engine vehicles and traditional domestic heating systems, however, are immediately visible to voters. Opposition to such effects is understandable.

The status-quo bias in policymaking is not new. It plagues areas including contending with unsustainable fiscal deficits or implementing productivity-enhancing reforms (structural reforms). War-of-attrition models (for example, Alesina and Drazen, 1989) have been used to study policy outcomes in situations when there are multiple veto players, and welfare-enhancing reforms with the potential to make everyone better off are delayed until one of the veto players concedes, once it becomes apparent that the cost of continuing to fight exceeds the cost of the concession (the loss – or distributional penalty – from the reform itself).

The sentiment that there is a political penalty to be paid from structural reform (Ostry et al, 2019, 2021) was expressed in the 1990s by Jean Claude Juncker before he became President of the European Commission: “We all know what to do; we just don’t know how to get re-elected once we’ve done it.” Niccolò Machiavelli expressed a similar idea half a millennium earlier when he warned that reformers would have as enemies “all those who have done well under the old conditions” and only “lukewarm defenders” in those who may do well in the new situation.

What will it cost?

In Furceri et al (2023) we estimated the average effect of climate change policies (CCPs) on popular support for the government implementing them. We used the OECD’s Environmental Policy Stringency (EPS) indicators (Botta and Kozluk, 2014) as proxies for CCPs, and the International Country Risk Guide Index of Popular Support to proxy the level of government support. Our assessment covered 30 developed and emerging economies between 2001 and 2015 (see Furceri et al, 2023, for technical details).

The popular support measure is based on opinion polls and scaled between 0 (high risk of losing office) and 4 (low risk). The OECD’s EPS measure is the most comprehensive source for environmental policy measures across countries (28 OECD and six BRICS countries) and time (1990 to 2015). All policy indicators are scaled from 0 (not stringent at all) to 6 (very stringent). In addition to its wide geographical and temporal coverage, the dataset includes both market-based and non-market-based measures, such as indices of taxation of emissions, trading schemes and feed-in tariffs (market-based), and indices of emission limits and research and development subsidies (non-market-based). The availability of these sub-indices allowed us to test whether some instruments are politically costlier than others.

We found that, overall, increasing environmental policy stringency has significantly negative and sizeable effects on popular support for the government. A government moving from the first to the third quartile of the EPS distribution will experience on average a 10 percent decline in popular support. This impact is equivalent to a decline in vote share of about 11 percent during election years – a sizable impact, especially when electoral outcomes are close. These results are robust to alterative sets of controls and the magnitude of the coefficients does not change with model specification.

We also used an instrumental variable (IV) approach to estimate the causal effect of CCPs on popular support for the government. Our instrument interacts a time-varying global term capturing cross-national pressure for climate change policies (the occurrence and impact 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 as a gauge of vulnerability to rising sea levels). The IV estimates suggest a much larger political cost of CCPs than the estimates described above.

Unpacking the cost

More detailed examination shows, however, that careful policy design offers pathways to mitigate the political costs, in three respects.

First, the adverse effect on popular support is markedly different depending on the type of instrument used. Market-based measures, such as emissions taxes, lead to significant drops in popular support (Figure 2). But non-market-based measures such as emission limits do not entail significant political costs. Though many economists see Pigouvian taxation as the first-best corrective tool for carbon emissions, opting for second-best nonmarket-based measures can be an effective alternative when market-based measures are not politically viable.

Second, timing and country characteristics matter. Political costs are higher when CCPs are adopted in times of high global fuel prices, but are statistically insignificant at times of low fuel prices. These findings suggest that political costs depend on the visibility of the reform and on the existing price level of affected products (eg fuel). CCPs also create a greater political backlash when adopted in economies that depend heavily on dirty energy sources. Economic diversification is thus an important overarching consideration.

Third, political costs are higher when inequality is relatively high and when social benefits – in the form of direct transfers to households, unemployment benefits and active labour market policies to help job reallocation – are relatively low. Remarkably, if inequality is low and benefits are high, the political cost of CCPs are statistically not different from zero. Climate-related policymaking is thus ultimately a social question, and sufficient social-insurance mechanisms are vital to enable the adoption of CCPs in a politically feasible fashion.

Policy design can help deliver a pathway out of political hesitancy

Successful implementation of climate-change policies requires political and popular support. Policy design is critical, in terms of instrument choice and the social policies that accompany a tightening of CCPs. Market-based instruments (taxes) seem far more politically toxic than non-market-based instruments (emission limits and regulations). Generous social-welfare policies and active labour-market policies are essential to mitigate the political costs from environmental policies.

Research has shown that some environmental policies are unpopular among some voters, but there is little evidence on how adoption of CCPs affects the popularity of the government overall. Our research sheds some light on how environmental legislation translates into political costs for incumbents, and how policy design can be tweaked to make CCPs more acceptable to voters.

About the Authors

Jonathan D. Ostry is a non-resident fellow at Bruegel, as well as Professor of the Practice of Economics at Georgetown University in Washington, DC; he is also a Research Fellow at the Center for Economic Policy Research in London and serves on the advisory board of the World Economic Forum’s Global Risk Report in Geneva. Prior to his appointment at Georgetown, he served at the International Monetary Fund in senior roles, including as Deputy Director of the Research Department and Acting Director of the Asia and Pacific Department. Professor Ostry received his PhD in Economics from the University of Chicago, an MSc from the London School of Economics, and a BA in PPE from Oxford University.

Michael Ganslmeier works at LSE as a Fellow in the Methodology Department. He has a PhD from the University of Oxford, a master’s degree from LSE, and a bachelor’s degree from Zeppelin University. In his doctoral thesis, he used causal inference and machine learning methods to study how social policies affect the way people vote. Michael has also worked as a researcher and consultant for many organizations, including the International Monetary Fund, World Bank, University of Oxford, LSE, University College London, and King’s College London.

Davide Furceri is Deputy Division Chief of the Development Macroeconomic Division in the IMF Research Department. Prior to joining the Fund, he was an economist at the Fiscal Policy Division of the European Central Bank, and at the Macroeconomic Analysis Division of the OECD Economics Department. He has published extensively in leading academic and policy-oriented journals on a wide range of topics in the area of macroeconomics, public finance, international macroeconomics and structural reforms.


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