DPP PhD Student Daniel Muth has published a new article in the journal Ecological Economics. In his research, he analyzes carbon pricing stringency from a novel perspective. These climate policies, which could prove pivotal to combatting global warming, have many political economy challenges to overcome. For instance, taxes on carbon use disproportionately affect lower-income classes, and paying them can also burden companies, cutting into their profit margin. Another hurdle is the general skepticism of the public towards the ability of carbon pricing to lower carbon emissions due to the inelastic demand for motor and heating fuels and affordability issues with low carbon alternatives (e.g., heat pumps, electric vehicles). These factors erode political support for the implementation of ambitious policies. However, using the revenue generated by carbon pricing to compensate adversely affected social groups, and to invest in climate change mitigation efforts, can ease this political impasse by changing public perception on policy fairness and environmental effectiveness. This can be done through various channels, such as increasing welfare payments to low-income households, or spending on decarbonization efforts which also bolsters support from political coalitions of green industries.
In his study, he investigates which revenue recycling strategies are effective in different political economy environments. Since countries differ significantly in their socioeconomic environments, revenue recycling measures need to give effective responses to local constraints. These constraints could include income inequality, fossil fuel dependence or the cost-absorption capacity of firms. By comparing thirty national-level carbon pricing policies, employing fuzzy-set QCA, it is found that countries using a hybrid use of revenue (compensating negatively affected social groups conjoined with spending on climate action) can and do implement higher carbon prices than those with similar structural conditions, who do not provide any relief measures. Furthermore, it is demonstrated that structural constraints can be effectively mitigated by revenue recycling, enabling the implementation of stringent policies, or the reformation of existing policies to be more stringent. These results have some significant, direct policy implications. For example, they indicate that policy makers need to consider how to combine their ambitious climate objectives with adequate social support mechanisms, for a cleaner and fairer future.