Climate policies and nationally determined contributions: reconciling the needed ambition with the political economy

Abstract

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Managing the distributional effects of energy taxes and subsidy removal in Latin America and the Caribbean

“…In many cases, the general population does not know how much government spends on energy subsidies, or how to reduce them could provide more fiscal space for spending on social protection programs, health, public transportation, and education. Providing that information and communicating how complementary policy packages can transform losers into winners may facilitate the political economy of reform (Fay et al, 2015;Vogt-Schilb and Hallegatte, 2017).…”

“…Among the many policies that can be used to support this transition (Fay et al, 2015;OECD, 2017), carbon taxes increasing the price of fossil energy have received significant attention. Carbon taxes are also advocated as an efficient fiscal policy to reduce informality, finance investment in infrastructure, and fund social and environmental programs (Stiglitz and Stern, 2017;Vogt-Schilb and Hallegatte, 2017). Carbon taxes, together with fiscal gains from subsidy removal, can contribute to close three of the most prominent development gaps in Latin America and the Caribbean (LAC).…”

“…Energy price reform is often difficult, however, due to the potential adverse near-term economic and social impacts (Di Bella et al, 2016). From a political economy point of view, one reason subsidies exist is because they are a visible mechanism for governments to provide benefits to poor and middle-class voters, and sometimes to industrial interests, in exchange for political support (Victor, 2009;Vogt-Schilb and Hallegatte, 2017). Taxes on energy could harm those voters and special interests, reducing the likelihood that a reform succeeds.…”

Stranded asset implications of the Paris Agreement in Latin America and the Caribbean

“…The issue of stranded assets is important because they could result in financial market instability which in turn could create macroeconomic instability [11]. Stranded assets could also create political instabilities due to a rapid loss of wealth for the owners of affected capital assets, potentially resulting in lobbying and rent-seeking behavior [12].…”

Committed emissions and the risk of stranded assets from power plants in Latin America and the Caribbean

“…Closing down power plants would also result in sudden losses of jobs for the workers and communities who depend on those assets. Both impacts are politically difficult to manage because they create concentrated losses on homogenous groups that can easily organize to protest the reforms (Olson 1977, Trebilcock 2014, and because they can go against policy objectives of social inclusion (Hallegatte et al 2013, Jenkins 2014, Bertram et al 2015, Nemet et al 2017, Vogt-Schilb and Hallegatte 2017, Gambhir et al 2018, ILO 2018, Rozenberg et al 2018.…”