Written by Marie-Christina Dankmeyer, Advisor Just Transition and Social Protection Financing at Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH.

 

As climate change continues to affect people globally, and with countries having to transition towards a low-carbon economy, climate policies will impact on population groups differently. Two climate change mitigation policies that affect households directly are carbon pricing and the removal of fossil fuel subsidies.

The microsimulation study ‘The Role of Social Protection for a Just Transition in Developing and Emerging Economies', conducted jointly by authors from SASPRI, LSE, IDOS and GIZ, explores the impacts of these climate policies on poverty rates and analyses which social protection reform options are most effective in alleviating the negative impacts of these climate policies on people in low- and middle-income countries. This blog post summarises the study’s main findings and conclusions.

 

What impact do climate change mitigation policies have on poverty and inequality?

 

This study provides insights into how the selected climate change policies may negatively affect people and vulnerable groups disproportionately in six developing and emerging economies: Ecuador, Indonesia, South Africa, Tanzania, Viet Nam and Zambia. The main focus is on carbon pricing, as it is a globally considered mitigation measure with significant direct impacts on the financial situation of households. For a subset of countries (Indonesia, South Africa and Zambia), the study also looked at the direct impact of the removal of subsidies for carbon-intensive goods.

 

Key findings:  

  • Policy interventions such as carbon pricing and the removal of fossil fuel and electricity subsidies can have a significant negative impact on households, especially in countries where climate-friendly energy sources are scarce and behavioural change is difficult. 
  • In Ecuador, South Africa and Viet Nam, the simulations indicate that introducing carbon pricing would disproportionately disadvantage people in lower income/consumption quintiles. 
  • Compared to even a low carbon tax rate, the removal of fossil fuel subsidies leads to rather small relative changes in mean consumption. However, the removal of such subsidies affects the poorest quintile the most in Indonesia and South Africa (in Zambia, better off households are affected more).

 

These findings illustrate why social protection will be important to help mitigate the negative impacts of climate policies, thus allowing for more ambitious climate action, as illustrated in Figure 1. 

 

Figure 1: The poverty impact of carbon pricing with and without modelled social protection reforms

Source: Gasior et al. (2024: 30). 

 

How can the fiscal space generated by carbon pricing and subsidy removal be used to expand social protection?

 

Using tax-benefit microsimulation, the study also assessed how the revenue generated by climate change mitigation policies could be used to expand the existing social protection system. The six low- and middle-income countries considered in the study have different starting points for expanding social protection, a wide range of income groups and different potentials for generating resources. The simulation considered three social protection reform options: 

  1. The ‘generosity’ reform increases the benefit amount/duration of existing schemes (vertical expansion), covering the same number of programme participants.
  2. The ‘coverage’ reform expands existing schemes to more people (horizontal expansion), with a more moderate increase in benefit amounts.
  3. The ‘categorical’ reform leaves all existing schemes as they are, but introduces a new unconditional scheme for select vulnerable groups (children, the elderly, people of working age with disabilities).

 

The cushioning effect of social protection reforms financed by carbon pricing

 

  • All three reform scenarios cushion the overall drop in mean income/consumption. While they lead to significant income/consumption increases at the bottom of the distribution across countries and reform scenarios, the same effects are not observed towards the top of the distribution. 
  • In four of the six countries (Ecuador, Indonesia, South Africa and Viet Nam), the modelled social protection reforms not only cushion the shock of carbon pricing, but indeed result in an overall reduction in the poverty headcount, compared to the current situation. In contrast, in Tanzania and Zambia, the poverty headcount is not significantly reduced, because the revenue generated is too small to fill the gaps in the current social protection system.  

 

Three social protection reform scenarios: Different investments, different impacts

 

The generosity reform scenario: 

  • Increasing existing social protection benefit amounts (vertical expansion) leads to a more significant reduction in poverty than increasing coverage in Ecuador, Indonesia, Viet Nam and South Africa.  
  • When poverty is concentrated at the bottom of the distribution, the generosity scenario results in better cushioning effects for those in poverty than the coverage and categorical scenarios. This is particularly notable in the case of Viet Nam.
  • However, increasing generosity for those currently covered by social assistance does not necessarily provide the best cushioning effects for those in the lower quintiles.
  • The generosity reform’s impact depends on the coverage of those in need in the current social protection system.

 

The coverage reform scenario:

  • Extending social protection coverage to more people can lead to better results for lower-income population groups, i.e. the lower quintiles in the income distribution.
  • In Zambia in particular, this coverage scenario shows a higher relative increase in average income for people in the bottom quintile as such a reform resolves coverage gaps in the current social protection system.

 

The categorical reform scenario:

  • The introduction of a categorical benefit for vulnerable groups has a stabilising effect on income/consumption in most of the countries considered. This comes at the cost of smaller increases in average income/consumption for people in the lower quintiles, compared to the other two reform scenarios (except in South Africa and Ecuador).  
  • Categorical benefits for specific groups are an option for countries where poverty is not solely concentrated at the bottom of the income/consumption distribution, such as Tanzania and Zambia, with potentially easier administration.

 

Not every social protection reform yields the same results in different contexts.

 

The study highlights that the reform impact notably depends on the following, e.g.:

  • The existing poverty situation: In countries with high levels of poverty, the potential for significant poverty reduction is lower. This is because the revenue generated by carbon pricing often only provides limited resources, compared to what is needed to reform existing social protection systems.
  • The effectiveness of the existing social protection system: This is true both in terms of existing benefit levels and coverage. The status quo also determines the extent to which existing benefits can/need to be extended or complemented by a new categorical benefit. This means that the shortcomings of existing systems are potentially amplified when introducing climate change mitigation policies.
  • The available financing or potential: In addition to existing fiscal space, countries with higher carbon footprints have greater potential for revenue generation through the introduction of carbon pricing (such as South Africa) and are in a better position to reinvest it in improving social protection. 
  • Fiscal space may also have to be used to strengthen the functionality of the social protection system, by investing in infrastructure (data and information, delivery mechanisms, physical and staff capacities, etc.).  

 

What are the recommendations for policymakers emerging from the study with regards to a just transition?

 

  • Consider social protection not only as an instrument to reduce poverty, but also as a key policy area to complement climate change mitigation – and achieve a just transition. 
  • Apply social protection to enable more ambitious climate action and sustain public support for it: Research has shown that climate change mitigation policies are more likely to be supported if the revenue is used to support and protect populations groups (likely to be) affected (Dabla-Norris et al., 2023). 
  • Understand how the existing social protection system works and what its limitations are in order to effectively mitigate the negative socio-economic impacts of climate change policies. 
  • Select the most appropriate social protection reform(s), possibly also in combination, based on the country context and taking into account the current poverty situation, fiscal space, and carbon usage, as well as the capacity of the existing social protection system.
  • Plan social protection policies well in advance as part of a just transition package. In this way, social protection can alleviate, or even avoid, the negative socio-economic effects of climate change mitigation policies, especially on vulnerable people and those already living in poverty.
  • Learn more about which social protection reforms may be most suitable for your country contexts in the full study.
  • Also consider options at the global level, e.g. a global carbon tax, which is likely to have a much stronger impact on poverty reduction – especially in low income, low-carbon footprint countries – than national carbon pricing.
Social Protection Programmes: 
  • Social assistance
    • Social transfers
    • Subsidies
Social Protection Building Blocks: 
  • Policy
    • Coverage
    • Expenditure and financing
  • Programme design
    • Benefits design
    • Targeting
Social Protection Approaches: 
  • Social protection systems
Cross-Cutting Areas: 
  • Climate change
    • Climate Change Adaptation
  • Inequalities
  • Poverty reduction
Countries: 
  • South Africa
  • Tanzania
  • Zambia
  • Ecuador
  • Indonesia
  • Vietnam
Regions: 
  • Global
The views presented here are the author's and not socialprotection.org's