Climate policy hinges on the vital intersections of politics and economics

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The author is a professor of economics at Georgetown University and a nonresident fellow at Bruegel.

The constant stream of headlines highlighting the rapid pace of climate change reminds us of the urgency for action to mitigate the devastating effects on our planet. The key players in addressing this crisis are government entities responsible for implementing effective climate policies. However, there remains a remarkable hesitancy among politicians, despite the need for accelerated efforts.

This hesitancy often stems from the political complexities involved in policymaking. For example, European Parliament President Roberta Metsola cautioned lawmakers not to exceed the boundaries between ambitious green policies and public support, emphasizing the importance of considering the economic and social impact of environmental policies as they head into future elections.

Political inaction is often driven by the fear of backlash from special interest groups, particularly regarding green policies that may cause economic hardships. The costs of addressing climate risks are typically concentrated and immediate, while the benefits are diffuse and lie far in the future. This has led to mounting opposition against net zero policies worldwide, especially due to the significant distributional consequences associated with phasing out fossil fuel-based transportation and traditional heating systems.

Economists have long studied the status quo bias in policymaking and the reluctance to adopt new orders of change. Recent work by my colleagues and I has explored the significance of this bias in climate change policymaking.

We examined whether governments implementing climate change policies experience a decline in popular support and whether the fear of implementation is rational. We also explored potential strategies to mitigate the political fallout.

Traditionally, economists prioritize economic efficiency over political considerations. They advocate for efficient solutions, such as carbon taxation, even if slightly less efficient measures may increase the chances of political feasibility. However, politicians may dismiss economic policy advice they perceive as politically naive.

From our research, four main lessons can be drawn:

First, the hesitancy of governments in implementing climate change policies is rational, as more stringent policies are often associated with lower popular support.

Second, the design of the policy significantly affects the political impact. Market-based instruments, like emission taxes, are more likely to damage popular support, while regulations, such as emission limits, appear less controversial.

Third, the distributional consequences of climate change policies heavily influence their electoral effects. The economic burden is concentrated among vulnerable groups, necessitating targeted redistributive measures for those experiencing higher economic insecurity.

Implementing climate change policies during periods of rising economic inequality leads to significant political backlash, while the impact is less severe when inequality is declining. Providing social insurance to affected groups, such as direct transfers to households, unemployment benefits, and labor market policies, is crucial to mitigate political fallout.

Finally, the timing of policy implementation in the electoral cycle is important. The damage to popular support is greater when climate change policies are enacted close to elections, while introducing them earlier in the cycle yields more favorable results.

Addressing climate change requires considering more than just economic efficiency. Economists must account for social and political dimensions in their recommendations, even if it entails a slight trade-off with economic efficiency. Ultimately, they should avoid prioritizing perfection over meaningful progress.