How does climate change shape inequality, poverty and economic opportunity?

Climate change and economic inequality are often considered independently of one another. But it is not possible to address either of these challenges without engaging with the other: they are inextricably linked.

Unabated climate change will have dramatic effects on inequality, poverty and economic opportunity. At the same time, poverty and inequality contribute to climate change. For example, social polarisation and income inequality within countries directly affect support for policy action.

There is also huge inequality in the historical contribution to climate change. The UK and other advanced economies are largely responsible for either generating or consuming the vast majority of emissions historically. Yet without action from developing countries, which collectively account for generating 60% of emissions today and almost all emissions growth going forward, global emissions reductions will not be achieved (Wolfram et al, 2012).

Figure 1: Projected increases in energy consumption by 2050

Source: International Energy Outlook, 2019

‘Degrowth’ is not a solution. We need a bigger, cleaner and more inclusive global economy. But, developing economies, which are rightly focused on growth and development to reduce poverty and increase relative living standards, will increase emissions, unless they can be decoupled from growth and development.

Low-carbon growth opportunities do exist (Acemoglu et al, 2012; Aghion et al, 2016, Van Reenen, 2020; Stern and Valero, 2021). In advanced economies, growth is constrained by new innovations and technological progress. Investments in new low-carbon solutions could fuel a new industrial revolution. But this is not guaranteed.

Differences in values and political constraints could limit innovation and the structural transformation needed to mitigate climate change (Besley and Persson, 2021). Further, even if a low-carbon industrial revolution in developed countries unfolds, constraints on technology adoption and integration may impede the decoupling of emissions in developing and emerging economies.

Understanding what these constraints are and how amenable they are to policy intervention is critical if we are to reduce emissions and increase global prosperity.

We are already being harmed by climate change. In June 2021, temperatures in the Pacific Northwest hit a record high of 46.6°C during a four-day heatwave, killing more than 200 people. Scientists from World Weather Attribution analysed that this heatwave would have been virtually impossible without climate change. The heavy rainfall events that led to severe flooding in Western Europe at the same time were also found to be made more likely by climate change.

These events dominated headlines around the world. Other events in 2021 – severe flooding in Ghana, Niger, India, Afghanistan and South Sudan, drought and heatwaves in Central Asia, Tropical Cyclone Seroja, which hit Indonesia in early April, and Hurricane Grace, which hit Haiti two days after it experienced a M7.2 earthquake – received less attention.

Socially and economically disadvantaged groups bear the brunt of climate change and other environmental risks. Whether making comparisons between or within countries, the poorest and most vulnerable tend to be more exposed, lose a greater share of their wealth when disaster strikes, and have fewer resources to cope with the consequences.

But vulnerability is not simply a descriptive way to delineate the consequences of environmental disaster. Poverty, inequality and economic opportunity are directly shaped by environmental risk, which in turn affects vulnerability to future environmental shocks.

Climate change and inequality across countries

To date, much of the emphasis has been on inequality across countries. Evidence suggests that total damages from natural disasters and higher temperatures are larger in developing countries (Dell et al, 2012; Hsiang and Jina, 2014; Burke et al, 2015; Diffenbaugh and Burke, 2019; Carleton et al, 2020; Nath, 2021). Research shows that the relationship between economic activity and temperature is non-linear, with productivity peaking at 13°C and declining strongly at higher temperatures (Burke et al, 2015).

That rich and poor countries appear to respond similarly when exposed to the same temperatures raises concerns about the degree to which wealthier countries will be protected from higher temperatures, as well as the degree to which development will attenuate economic losses as poor countries become wealthier.

As poor countries tend to be exposed to higher temperatures, they currently suffer and will continue to suffer the most from higher temperatures. Because of larger temperature-driven reductions in GDP per capita in the poorest countries, it is estimated that the ratio between the top and bottom income deciles is likely to be 25% larger today than it would have been in the absence of experienced global warming (Diffenbaugh and Burke, 2019).

Does climate affect growth as well as levels of output? This is an open question. While level effects are straightforward to rationalise (for example, higher temperatures reduce agricultural output), the underlying mechanisms behind growth effects are less clear.

In developed countries, growth effects seem less likely because growth is shaped by new innovations and technological progress. In developing and emerging economies, growth effects are more of a possibility because growth is shaped to a greater extent by events and institutional change.

Higher temperatures may affect investments if climate-induced scarcity reduces savings and investments at low income levels, or if climate events affect institutions through civil unrest and conflict. It is also possible that climate shocks such as natural disasters, droughts and other extreme weather could result in persistent level effects if they cause people to become trapped in poverty (Balboni et al, 2021).

Understanding the relevance of these mechanisms almost certainly requires a more micro-founded examination and understanding of the relationship between climate change, growth and development.

Climate change and inequality within countries

There is less evidence on how climate risk affects inequality within countries. We need more systematic evidence on how climate risk and exposure, the consequences of climate events, the costs of climate adaption and mitigation policies and the benefits from opportunities arising from transitions to a low-carbon economy affect different groups within society. Understanding these effects is critical if we are to increase resilience and ensure a fair and just transition.

To do so, better awareness of how existing disparities interact with climate risks and policy responses is needed. The most vulnerable groups in society have neither the means to protect themselves against climate events nor to recover from them when they strike.

This is likely to exacerbate existing inequalities: when higher temperatures reduce productivity, earnings and health, and hurricanes destroy homes and employment opportunities, the economic situation of those most in need is made more precarious still, and further worsens their economic standing.

For example, the economic effects of higher temperatures are not restricted to agriculture. Higher temperatures have been shown to affect productivity and injuries in non-agricultural settings in both developed and developing countries (Graff Zivin and Neidell, 2014; Colmer, 2021; Somanathan, 2021).

Even educational attainment has been shown to be affected by higher temperatures, reducing test scores and learning (Park, 2020; Goodman et al, 2020). When schools have air conditioning these effects do not exist and so they affect children in poorer school districts the most, exacerbating existing disparities in educational achievement.

While progress has been made to understand inequality in exposure to environmental risks such as air pollution (Mohai et al, 2009; Banzhaf et al, 2019; Colmer et al, 2020; Currie et al, 2021), the distributional effects of climate change, natural disasters and climate policy are still little understood.

Rather than focusing solely on climate-specific policies, it is also important to ask how broader efforts to improve economic opportunity and reduce poverty and inequality can increase resilience and reduce vulnerability.

In the United States, investments in social insurance, health and nutrition targeted towards children and vulnerable families have been shown to be especially effective (Hoynes and Schazenbach, 2018; Wherry et al, 2018; Miller and Wherry, 2018; Bailey et al, 2020; Hendren and Sprung-Keyser, 2020).

Understanding the degree to which access to social insurance, healthcare and other non-environmental policy levers affect the translation of environmental shocks into economic losses remains an important area for future research.

Inequality within countries may also affect support for climate change policies. The fight against climate change is often presented as a luxury for elites, funded by those who are less privileged.

Whether one looks at the ‘yellow vests’ movement that emerged in France in 2018, the ‘war on coal’ in the United States, or developing countries fighting against having to pay for the choices made by those in developed countries, there is a disconnect between those demanding action and those that are being asked to pay for it.

It will be costly to mitigate the effects of climate change and to adapt to the climate change that we are already experiencing. If policies are to be politically acceptable, serious consideration must be given to who is paying.

In the United States, the Green New Deal and other efforts to link climate change action with economic justice have been popular. But by placing less emphasis on market-based mechanisms, such as carbon taxes, these policies are likely to be far more costly.

Carbon taxes can be linked to economic justice goals as well (Fried et al, 2020). The money raised by carbon taxes should be redistributed as a lump-sum transfers to lower-income groups. Not only would low-income individuals be compensated for increases in energy prices, but they would also come out ahead. This would preserve incentives to reduce emissions, while making it very clear that the less wealthy would not be paying for it.

If inequality and climate change are not addressed together, it is unclear whether either can be addressed at all.