Basic income and related forms of unconditional support: A role in promoting a green & fair transition?

Written by Herwig Immervoll, Head of Social Benefits and Green Transition, OECD

 

This blog is a shortened version of a forthcoming OECD policy brief. It draws on recent findings on the distribution of carbon-price burdens and related compensation strategies (Elgouacem, et al., 2024). The opinions expressed and arguments employed in this blog are those of the author alone. They cannot be attributed to the OECD or its member countries.

 

Universal and unconditional support: Considerable policy interest

Recent crises and ongoing social and technological transformations continue to shine a spotlight on economic insecurity and inequality, and on policies that seek to avert or ease them. Global and multi-lateral policy frameworks and agreements, like the UN Social Development Goals and the European Pillar of Social Rights, define specific targets and principles for social protection coverage. A frequent focus of debates is the capacity of social transfers to cushion earnings losses. Existing programmes do not reach everyone in need of support but the size of such ‘social protection gaps’ varies enormously across countries and programmes. Some OECD countries in fact provide social benefits to practically all job losers on low incomes (Immervoll, Fernandez, Hyee, Lee, & Pacifico, 2022). In much of the OECD, however, fewer than one-third of active jobseekers receive unemployment benefits (OECD, 2018). Lower-tier safety nets, such as means-tested minimum-income benefits for the poor, are typically less accessible still, also because of high rates of non-take-up (Frey & Hyee, 2024).

The growing interest in simple, reliable, and accessible income support is partly linked to policy debates around an observed or expected rise in atypical forms of employment (OECD, 2019). Platform work and other atypical work relationships, associated with automation and digitalization, can blur lines between traditional employment and independent work. They can also complicate income measurement and make it harder to assess whether someone is working at all (e.g., in the case of so-called “zero-hours” contracts). This creates challenges for support strategies that condition social transfers on work status, employment history, and earnings. When existing targeting strategies fail to cover those in need, moving towards greater universality is one option for keeping social protection accessible.

Recent health, economic, and social emergencies intensified debates on effective targeting and the merits of universal versus needs-based support. As governments responded to the COVID pandemic and the cost-of-living crisis, accessible, reliable, and timely support became a growing focus of national and international policy debates. Many governments adopted sizeable support measures that benefited large parts of the population. Quasi-universal or weakly targeted support was also relatively common, including in high-income OECD countries with a long history of comprehensive social protection (Denk & Königs, 2022; OECD, 2022). There were some calls for ‘emergency basic incomes’ (De Wispelaere & Henderson, 2024; Orton, Markov, & Plaza‐Stern, 2024).  

 

A realistic policy option, or simply too expensive?

In several countries, notably in the OECD area, specific population groups already receive unconditional public transfers, such as child or family benefits and basic old-age pensions (OECD Family Database, OECD Pensions at a Glance). But to date, no country has introduced a nation-wide and permanent basic income (a uniform and unconditional payment to everyone).    

Variants of a basic income have been tested in policy experiments, including time-limited pilots run by governments (e.g., Finland) or by non-governmental organisations (e.g., India, United States). Such experiments have provided valuable insights on a range of outcomes such as employment, well-being, and time use (indeed, one argument for a basic income is that it would facilitate activities with positive spillovers, such as training or caregiving). For a systemic policy change like a basic income, it can be difficult to extrapolate from pilots run for a small select group to reforms ‘at scale’ that would in fact introduce regular payments to everybody. One reason is that pilot participants are rarely representative of the population at large, but are often drawn from specific sub-groups, such as the unemployed in the Finnish experiment or low-income individuals in a recent US study (Kangas, Jauhiainen, Simanainen, & Ylikanno, 2021; Vivalt, Rhodes, Bartik, Broockman, & Miller, 2024). More generally, experiments are, by their nature, time-limited and do typically not include the fiscal measures (e.g., raising taxes or reducing/abolishing transfers other than the basic income) needed to finance a full-scale basic income.

Fiscal constraints have, indeed, been a principal obstacle for basic-income initiatives, both in high-income and in middle-income countries (OECD, 2017; Enami, et al., 2023). Calculations for OECD countries show that converting spending on existing social benefits into a basic income for everybody aged under 65, would typically amount to a per-capita transfer of less than 1/3 of commonly used relative poverty lines. Realistically, a basic income at ‘meaningful’ levels – e.g., close to the income standards that countries use for means-tested minimum-income programmes – would require sizeable tax increases and large cut-backs in existing transfer programmes (Browne & Immervoll, 2017). While everybody would receive a basic income payment in such a scenario, significant shares of the population, including among disadvantaged groups, would likely lose out.

 

Supporting households towards Net Zero: The imperative of a just transition

As with other ‘mega trends’, support to households is a key part of the green transition and associated emission abatement policies. Climate change and climate‑change mitigation both have potentially major welfare and distributional effects. In the medium to long term, large sections of the global and national populations will be significantly better off with effective climate‑change mitigation that averts rapid-onset disasters (floods, hurricanes, wildfires) and catastrophic slow-onset events (desertification, heat waves, rising sea levels). In the short term, however, there can be notable trade‑offs between the intended effects of mitigation policies, such as incentives from higher carbon prices, and unintended distributional effects (Baumol & Oates, 1988; Baranzini, Goldemberg, & Speck, 2000).

The specific patterns of short-term losses, in turn, are key drivers of public and political support for necessary policy action to fight climate change (Büchs, Bardsley, & Duwe, 2011; Tatham & Peters, 2022). There are concerns among policymakers and the public about undue burdens on households, workers, and firms, sparking notable controversies and protests by specific groups in some countries. Surveys asking households directly about their concerns indicate that economic worries frequently rank higher than environmental ones (OECD, 2023), suggesting that voters may resist carbon pricing if they perceive that it will create significant personal costs. A dedicated large‑scale survey of 40 000 people across 20 OECD countries and emerging economies (Dechezleprêtre, et al., 2022) indeed shows that support for mitigation measures depends both on expected personal gains and losses and also on broader distributional impacts, such as respondents’ perception of burdens on lower-income households. Unless a green transition is just, tensions may rise between the need for decisive climate action and its political feasibility of.

Carbon pricing is one of several policy tools for achieving national and international net-zero commitments. Like other mitigation measures, carbon pricing can be controversial, not least in the context of recent cost-of-living increases. Figure 1 reports household burdens from recent carbon-pricing reforms across the income spectrum. During the 2012-21 period, the costs for households were in fact often muted overall. In four of the five countries, the additional cost for an average household’s consumption basket was 1% of income or less (see figure notes). However, carbon price burdens were significantly higher for some groups, and effects were mostly regressive. In four countries, carbon price increases had a regressive impact overall, especially in Türkiye and in Poland. A notable exception is Mexico, with higher relative burdens on high-income households, reflecting geographic / climatic factors and a top-heavy pattern of energy spending, as previously documented also for other middle-income countries.

As the urgency of climate-mitigation action escalates, future carbon price increases may need to be much larger and fast-paced in some countries than they have been during the past decade. The mostly regressive patterns of past reforms underscore the need for compensation measures, both for equity reasons, and to ensure necessary public and political support.

 

Figure 1. A decade of carbon-pricing measures: Did they create large household burdens?

Note: ETS stand for Emission Trading Systems. Change in the cost of household-specific consumption baskets is expressed as a share of disposable household incomes, based on fixed consumption baskets (2015 in EU countries, 2016 in Mexico and 2019 in Türkiye), fuel mix, and carbon intensity. Income deciles refer to equivalised disposable household income. The average household burden from carbon pricing reforms was as follows. France: +0.53% of total household income, Germany: +0.50%, Mexico: +1.03%, Poland: +2.34%, Türkiye: +0.09%. Changes are computed against the status quo and do not account for the distributional impacts of inaction.

Source: (Elgouacem, et al., 2024) based on calculations using OECD Effective Carbon Rates data, IEA emissions factors for different fuels, World Input-Output Database (WIOD) and household budget surveys (2015 for EU countries and 2016 for Mexico).

 

What type of support? ‘Basic income’ versus more targeted transfers

Unlike other abatement strategies, pricing carbon emissions generates immediate revenues. Governments can use these to offset some of the adjustment costs for households, and to make a green transition more equitable. One option that is sometimes favoured among researchers and in policy debates is to re-distribute revenues equally to everybody, similar to a basic income (Klenert, et al., 2018). “Recycling” carbon-tax revenues back to households in the form of lump-sum payments can seem attractive. Like a basic income, it is simple, comparatively quick to implement, and easy to administer. And, unlike some income tax reductions or targeted transfers, universal payouts benefit everyone. In 2018, carbon revenues, averaged 1.3% of GDP across OECD and G20 countries, comparable to key social spending categories in some OECD countries, like working-age income support or non-health social services. These revenues would go up substantially if/when carbon prices increase towards the levels that are seen in line with net-zero commitments.

The availability of carbon pricing revenues helps address the fundamental criticism of basic income proposals: affordability. While revenues will eventually subside as emissions are reduced, this aligns with households’ temporary adjustment costs and support needs during a green transition. However, like other government revenues, those from carbon pricing are subject to competing demands. In addition to redistribution, governments may need to finance climate-change adaptation measures, boost household investments in energy efficiency, help workers transition between jobs as part of a green transition, or reduce public debt. Cost effectiveness is therefore likely to be a key criterion for choosing among alternative compensation strategies.

Figure 2 shows the link between the size of the lump-sum payment, and the share of people who would lose out from a mitigation package that includes (i) the carbon pricing measures that countries have put in place between 2012-21, and (ii) a hypothetical lump-sum payment financed from carbon-pricing revenues. With no compensation at all, households face unchanged incomes while higher carbon prices translate into higher expenditures, making all worse off. As transfers increase, the share of losers eventually declines. Sometimes, ensuring that a majority are better off appears possible with less than the full carbon price revenues. In Mexico, where income inequality is high and low and middle‑income households face comparatively small carbon-price burdens, a majority could be better off even with only 20% of revenues channelled back to households via lump-sum transfers. This leaves significant budgetary space for other purposes, such as scaling up programmes that support and accelerate the net-zero transition, by tackling households’ underinvestment in energy efficiency, or facilitating the reallocation of jobs towards less carbon-intensive production.

In contrast, in France, Germany, Poland), compensating a majority via lump-sum payments requires comparatively large shares of revenues to be used for redistribution, leaving little to no resources for other purposes. Even at full revenue recycling, many households would lose out, indicating that flat-rate payments may not provide sufficient compensation when carbon-price burdens differ strongly between population groups. Efforts to reduce the fiscal costs of direct compensation measures require linking transfer amounts to household burdens and support needs. Such targeting can take different forms and need not necessarily involve income-testing. For example, lump-sum payments can be made taxable under the income tax (as often the case with basic-income proposals). Transfer amounts can also be differentiated by household location (urban/rural) or by demographic variables that are associated with emission levels, while maintaining the price signals needed to lower emissions.

Some countries have indeed already taken these or related approaches. For instance, Austria’s carbon tax, enacted in 2022, recycles all revenue as cash payments and uses location-based targeting: residents in regions with less access to public transport, for instance, receive more support. In practice, the suitability of compensation measures will vary across countries. To be cost effective, support strategies should be informed by continued country-specific monitoring of the distribution of carbon price burdens across households.

Figure 2. Cushioning household losses from carbon pricing: Share of individuals losing out when revenues are recycled as lump-sum payments

Note: Household compensation takes the form of uniform lump-sum transfers to each individual.

Source: (Elgouacem, et al., 2024) based on calculations using OECD Effective Carbon Rates data, IEA emissions factors for different fuels, World Input-Output Database (WIOD) and household budget surveys (2015 for EU countries and 2016 for Mexico).

 

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