In his latest study, Daniel Muth, a researcher at the Institute of World Economics at the HUN-REN Centre for Economic and Regional Studies (HUN-REN CERS), compared thirty national-level policies to analyse which revenue recycling strategies are effective in various political economy environments to support stringent carbon pricing. The results show that the most effective strategy to enhance stringency is the hybrid use of carbon revenue that combines various compensatory schemes and spending on climate projects. The researcher emphasizes the crucial integration of social and economic perspectives in shaping climate policies, as only through this integration can environmentally effective, socially acceptable, and politically feasible policy measures be implemented. The paper presenting the results was published in the journal Ecological Economics.
There is general agreement among economists and climate policy practitioners that carbon pricing should play a central role among all policies used to tackle climate change effectively. However, in most jurisdictions that have adopted carbon pricing mechanisms, the prevailing price levels remain too low to accelerate decarbonisation and drive down emissions. This deficiency can be attributed to numerous political economy constraints, but most pressingly, to the negative distributional effects of the policies combined with the drain they impose on firms' competitiveness. These factors negatively influence the public acceptability of these policies and, thus, the feasibility of introducing ambitious carbon pricing.
Recent innovations in the literature suggest that using the revenue from carbon pricing for specific social purposes may ease this political impasse. For instance, by compensating negatively affected social groups and eliminating the possibly regressive effects of carbon pricing, the public's perception on policy fairness can be changed. This study analyses which revenue recycling strategies are effective in various political economy environments to support stringent carbon pricing. As countries differ significantly from one another in their political economy environments (economic development, income inequality, fossil fuels dependence), their use of revenue should also respond to individual local constraints and accommodate differing social objectives. For example, the public may accept higher prices in countries that are more vulnerable to climate change, if the revenue is spent on adaptation. Alternately, in a socially polarised country where more people are exposed to energy poverty, compensation for poor households will be necessary to avoid equity issues. Employing the method of fuzzy-set Qualitative Comparative Analysis, this research draws findings from a cross-case comparison of thirty national-level policies. The salient conclusion is that hybrid use of carbon revenue that combines various compensatory schemes and spending on climate projects is the most effective strategy to enhance stringency, while a lack of compensation renders the introduction of ambitious carbon pricing implausible, even in some highly developed countries. These findings have direct policy implications, since they indicate that ramping up climate ambitions should be conjoined with adequate social support mechanisms.