Rethinking Climate Policies to Protect Low-Income Communities

Climate change is undoubtedly one of the most pressing challenges of our time, and the urgency to address it is felt across the globe. Many countries have implemented ambitious climate policies aimed at reducing carbon emissions and transitioning towards greener energy systems. Among the most prominent of these measures is carbon pricing, a tool designed to assign a financial cost to emissions, thereby incentivizing reductions. However, while the objectives of these policies are noble, their implementation has raised important questions about fairness and equity, particularly regarding how these costs are distributed across different income groups.

The issue at hand is not the need for climate action—this is largely accepted—but rather how these policies are affecting low-income households. In many cases, the burden of carbon pricing, along with the cost of green energy transitions, falls disproportionately on vulnerable populations. A more nuanced approach is required, one that ensures that climate policies are both effective and equitable. This means creating mechanisms, such as robust transfer programs, that shield lower-income households from excessive financial strain while ensuring that those who consume the most contribute their fair share.

Carbon pricing, whether through direct taxes or cap-and-trade systems, is widely viewed as an essential tool in the fight against climate change. By putting a price on carbon emissions, governments aim to encourage individuals and businesses to shift toward more sustainable practices. In theory, this makes sense: the higher the cost of emitting carbon, the stronger the incentive to reduce emissions.

However, the practical application of carbon pricing reveals some unintended consequences, particularly its regressive nature. Lower-income households tend to spend a larger proportion of their income on necessities such as heating, electricity, and transportation—goods and services that are often subject to carbon pricing (Henry; Merkle & Dolphin). In contrast, wealthier households, while consuming more on a per capita basis, may be able to absorb these costs more easily or may benefit from exemptions that are more likely to be applied to luxury goods and international travel (Merkle & Dolphin).

In Europe, for example, the average highest-income household paid $10.75 per ton of carbon dioxide in 2020, while the lowest-income households paid $1.25 more per ton (Merkle & Dolphin). This gap grows even wider in countries like Germany and France, where low-income families pay up to $2 more per ton of carbon dioxide than wealthier individuals (Merkle & Dolphin). These findings underscore how, without careful consideration, climate policies can exacerbate existing economic inequalities.

The disproportionate impact of climate policies on low-income communities becomes more apparent when we examine the consumption patterns of the wealthiest individuals. According to data from the World Bank, the richest 10% of the population in many countries consume a significant share of national resources (World bank). For instance, in Brazil, the richest decile controls 41% of total consumption, while in Colombia and Zambia, this figure exceeds 39% (World bank). Even in developed countries such as the United States and the United Kingdom, the richest 10% hold 30.2% and 24.6% of total consumption, respectively (World bank).

These figures suggest that the wealthiest segments of society have a considerably larger per capita carbon footprint. As such, it is only reasonable to ask whether current climate policies are adequately addressing this imbalance. If we are to design policies that are fair and equitable, those who consume more and contribute more to carbon emissions should bear a larger share of the cost. This, however, does not necessarily mean that carbon pricing should be abandoned. Instead, we must explore ways to structure these policies more progressively.

One potential solution is to tailor carbon pricing mechanisms in such a way that higher-income households face proportionally higher costs. This could involve scaling carbon taxes based on income or consumption levels, ensuring that those who contribute more to emissions pay a greater share of the costs. Further, to alleviate the burden on low-income households, governments could introduce or expand robust transfer programs. These transfers could take the form of direct cash payments or targeted subsidies that help offset the increased cost of energy, transportation, and other necessities that arise from carbon pricing. Such measures would allow policymakers to strike a balance between incentivizing carbon reduction and protecting vulnerable populations from undue hardship.

Beyond carbon pricing, the broader transition to green energy must also be made more inclusive. While policies aimed at promoting electric vehicles, renewable energy, and energy-efficient appliances are critical to reducing emissions, many of these technologies remain out of reach for low-income households. Subsidies for electric vehicles, for instance, often benefit wealthier individuals who can afford the upfront costs of these cars and often would have bought them anyway, while lower-income households continue to rely on older, less efficient vehicles (Xing, Leard, & Li).

A fairer and more practical approach would be to prioritize investments in affordable green technologies that are accessible to all income levels since although top earners have a disproportionate share of emissions it is not the vast majority of it (Oxfam). Governments could offer targeted subsidies for energy-efficient home upgrades, promote affordable public transportation powered by clean energy, or encourage the development of community-owned renewable energy projects. These initiatives would not only reduce emissions but also help lower-income households save on energy costs in the long run, making the green energy transition more inclusive.

As the world moves forward with ambitious climate policies, it is crucial that we do not lose sight of the principle of fairness. Low-income households should not bear a disproportionate share of the burden, particularly when wealthier individuals and corporations have a much larger carbon footprint. Climate change is a collective challenge and must be addressed collectively

References

LaVaughn M. Henry, Income Inequality and Income-Class Consumption Patterns, Federal Reserve Bank of Cleveland, October 6, 2014, https://www.clevelandfed.org/publications/economic-commentary/2014/ec-201418-income-inequality-and-income-class-consumption-patterns

Magnus Merkle & Geoffroy Dolphin, Distributional Impacts of Heterogeneous Carbon Prices in the EU, International Monetary Fund, July 12, 2024, https://www.elibrary.imf.org/view/journals/001/2024/149/001.2024.issue-149-en.xml

Magnus Merkle & Geoffroy Dolphin, How Europe Can Make Carbon Pricing Policies Less Regressive, International Monetary Fund, July 12, 2024, https://www.imf.org/en/Blogs/Articles/2024/09/26/how-europe-can-make-carbon-pricing-policies-less-regressive

Jianwei Xing, Benjamin Leard & Shanjun Li, Assessing Federal Subsidies for Purchases of Electric Vehicles, National Bureau of Economic Research, May 28, 2019, https://www.nber.org/digest/jun19/assessing-federal-subsidies-purchases-electric-vehicles

World Bank Poverty and Inequality Platform (2024) – with major processing by Our World in Data, https://ourworldindata.org/grapher/income-share-of-the-top-10-pip?tab=table

Oxfam, Confronting Carbon Inequality: Putting Climate Justice at the Heart of the COVID-19 Recovery, Oxfam Media Briefing, September 21, 2020, https://oxfamilibrary.openrepository.com/bitstream/handle/10546/621052/mb-confronting-carbon-inequality-210920-en.pdf