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Policy Analysis

Putting Poverty Alleviation and Inequality Reduction at the Heart of the Energy Transition

As the latest IPCC report has underscored, our window to reduce global emissions rapidly and avoid climate disaster is closing fast. But as governments implement the ambitious policies needed to transform the energy system, they must also account for the resulting impacts on inequality and poverty. 

By Joachim Roth, Lucile Dufour, Ipek Gencsu on April 22, 2022

The best policies positively impact both the planet and its most vulnerable people. However, not all energy policies in place today—even those that can lower carbon emissions—also reduce poverty and inequality, and some can actually have the opposite effect. Governments must ensure negative social outcomes are avoided or offset by designing policies to take this into account and/or pairing them with measures that counteract any risks.

A new dashboard from IISD and ODI begins to unpack the many ways in which different energy policies can affect inequality and poverty. The Inequality and Poverty Dashboard assesses the likely impacts of more than a thousand energy policies from the Energy Policy Tracker, adopted by 30 governments in advanced, emerging, and developing economies as well as European institutions during the COVID-19 pandemic. It covers the period between January 2020 and November 2021.

How Do Energy Policies Affect Inequality and Poverty?

The relationship between the climate, poverty, and inequality outcomes of energy policies is complex. 

First, there is no clear correlation between these policies’ environmental and social impacts. Both clean energy and fossil fuel policies can have negative or positive social outcomes depending on their design and implementation.

Second, the same policy can affect poverty and inequality differently. This is the case, for instance, when a policy provides economic support for lower-income groups, reducing poverty, but benefits higher-income groups even more, therefore widening the wealth gap. For example, incentives for electric vehicles and building retrofits tend to decrease poverty given that those sectors are highly labour intensive, but they are also likely to increase inequality, as wealthier groups can take advantage of the direct benefits of these incentives more easily.  

And third, context matters: for example, national circumstances such as average household energy spending, car ownership rates, and how much of a country’s job market is made up of informal employment can greatly affect the direction and magnitude of the social outcomes stemming from energy policies. 

Our analysis finds that energy policies implemented during the pandemic by the above-mentioned governments and institutions are likely to reduce poverty more significantly than inequality: 60% of these policies will likely decrease poverty while only 11% are likely to decrease inequality.

A GIF explaining the impact that energy policies from 2020 and 2021 have on poverty and inequality

The same policies also carry a higher risk of increasing inequality instead of poverty: without complementary social policies, up to 44% of these policies are likely to increase the gap between rich and poor. This illustrates that governments focused mostly on immediate, untargeted relief to households and industries during the pandemic without consistently accounting for how impacts would be distributed across different economic groups. 

Pursuing a Triple Win

As governments ramp up climate action, they must aim to enact energy policies that benefit the climate, poverty, and inequality: a triple win. This is critical because, as well as hindering socio-economic development, unchecked inequality can lower public support for the energy transition by putting the highest costs of climate mitigation on lower-income groups, who are those least responsible for climate change.

Only 13% of energy policies put in place after COVID-19 by the governments and institutions we studied provide both positive social and environmental impacts. The good news is that this means governments have a massive opportunity to increase these kinds of policies, such as those supporting energy efficiency in social housing.

Other clean energy policies should still be designed with social factors in mind, such as by targeting support to lower-income households and workers, involving local communities in decision-making processes, or making industry support conditional on decent work principles. Similarly, governments should embed energy policies within a broader set of social policies. This includes, for instance, developing retraining schemes for lower-income and sunset industry workers and using the revenues from carbon or energy taxes to increase social benefits.

Avoiding a Triple Loss

Like the COVID-19 pandemic, today’s energy price surge, accentuated by the war in Ukraine, is putting pressure on governments to respond rapidly with measures to limit the impacts of the crisis. Some governments are supporting consumers through reduced energy prices and others are considering increasing fossil fuel supply. But our research sheds light on the fact that the social and climate risks of such support seem too high to provide a valid rationale for adopting them.

Untargeted blanket subsidies supporting fossil fuel use might seem like the easiest way to offer rapid relief to households and businesses. Yet they are likely to increase inequality by benefitting higher-income groups most. These policies can also increase the vulnerability of households to fossil fuel price volatility instead of encouraging a shift toward cleaner, more resilient energy sources. 

Similarly, supporting fossil fuel production carries a high risk of negative social impacts in addition to dangerous environmental consequences. Although such policies have in some cases benefitted local employment and energy security in the short term, access to jobs in the fossil fuel sector is uneven, and wealth tends to concentrate in the hands of industry executives. The associated pollution will likely impact lower-income communities most and investing in the fossil fuel sector can ultimately hamper economic diversification needed for long-term prosperity.

With precious little time to avert the worst impacts of climate change, policy-makers must ensure their efforts contribute to a safe and healthy planet where all people can thrive. This will require understanding and accounting for the links between different types of energy policies and social factors like poverty and inequality. But by seizing the triple wins and avoiding apparent solutions that turn out to be lose-lose in the long run, together we can build the foundation for an equitable, sustainable future.

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