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Executive Summary

What's Fair? Workers, Investors, and Climate Change

February 2000
By Gary Wolff And Gautam Sethi

U.S. policy makers face an important and difficult issue: how can we protect the atmosphere that sustains life while safeguarding the economy that provides material wealth? Some argue that it is unfair to impose restrictions on the emission of greenhouse gases because it would create too much hardship for the present generation.

"What's Fair" examines the fairness question and argues that the current generation can and should reduce greenhouse gas emissions in a way that would minimize hardship. The authors conclude that revenue-raising policies--such as taxing emissions or auctioning emissions permits--will make emissions reductions fair and affordable to workers and investors.

Addressing Climate Change Is Fair to Future Generations

In January 2000, the National Academy of Science's National Research Council released a major report, stating that a worldwide rise in temperatures at the Earth's surface is "undoubtedly real" and has apparently accelerated in recent years. In 1995, after at least a decade of research and discussion, 2,500 of the world's leading climate scientists reached the consensus that human greenhouse gas emissions are having a "discernible" influence on global climate.

The potential impacts of human-caused global climate change--rising sea levels, increased severity of storms, and unpredictable, rapid shifts in weather patterns--justifies action. The fact that some scientific uncertainty exists regarding the severity of these impacts does not justify inaction. Most people would not delay treatment for cancer when 99 of 100 doctors are recommending it. And when the cancer is caused by a mess of one's own creation, the fair action is to clean up the mess now, rather that to leave it for future generations.

Addressing Climate Change Is Affordable for the U.S. Economy

Fortunately, current generations can afford to be fair to future generations. The average of credible economic models estimates that controlling U.S. emissions of greenhouse gases would result in less than a 0.5 percent one-time loss of Gross Domestic Product (GDP). Public policies with significant impacts are usually phased in over time. Assuming a ten-year transition period, this approach would amount to reduced growth of GDP and real income of less than one tenth of one percent per year. This means that the average American household would experience only a slightly slower rate of wage growth in return for protecting the global climate. Even the most pessimistic studies estimate that real GDP per employee will grow from $54,000 in 1995 to $61,000 in 2010 under Kyoto Protocol commitments.(1)

Addressing Climate Change Is Affordable for The U.S. Workers And Investors

Climate policies may cause some workers to lose their jobs and some investors to experience asset devaluation. But these impacts can be controlled by using revenue-raising policies and channeling some of the revenue to offset the impact. This paper discusses three important impacts on workers and investors: the displacement of workers, reductions in real wage rates, and reductions in the value of capital investments.

Revenue-raising policies--such as taxing emissions or auctioning emissions permits--will make emissions reductions fair and affordable to workers and investors.

The most pessimistic study estimates that 300,000 workers may lose their jobs (be displaced) due to climate policy. The statistic that is more frequently cited from these studies is how many fewer (or more) jobs will be created. For example, one study projects 2.4 million fewer jobs under climate policy than a projected baseline. Another study projects an increase of about 770,000 jobs by the year 2010, compared with a projected baseline. Slower job creation, if it occurs, has a significant impact--a downward pressure on wages. But this is a different impact than the actual loss of existing jobs. The two should not be confused.

Most studies indicate that reducing greenhouse gas emissions will, on average, diminish real wage growth. These studies, however, do not account for the impact on real wage growth of climate change itself. They compare climate policy against a baseline with no climate change, thus ignoring the most relevant question: "How will real wage growth differ between an economy experiencing unabated climate change and an economy experiencing policies that reduce climate change?"

How will real wage growth differ between an economy experiencing unabated climate change and an economy experiencing policies that reduce climate change?

Model results suggest that some investors may benefit from climate policy because the economic contraction predicted by models causes an increase in interest rates. While the contraction will have a negative effect on the economy because it makes borrowing for investment more expensive, this increase in interest rates will benefit owners of capital. For example, savings accounts increase in value faster when interest rates rise.

However, some types of old capital will decline in value because the particular policy that causes the rise in interest rates also decreases demand for some types of assets. For example, making fossil fuels more expensive causes a reduction in demand for fossil fuels. This in turn means that fossil fuel reserves in the ground--coal, oil, natural
gas--may become less valuable.

Even the most pessimistic studies show that slowing climate change is affordable. Also, the bleakest numbers result from studies that fail to account for the benefits of reducing pollution and rely on unlikely assumptions regarding how the U.S. economy will respond to climate policy, meaning the economic impacts are unlikely to be as severe as some argue. The following section discusses how these negative impacts can be mitigated.

Revenue-Raising Climate Policies Can Mitigate Impacts on Workers and Investors

Charging emitters for their greenhouse gas emissions by taxing emissions or auctioning emissions permits could raise between $30 and 300 billion every year. Revenue of this magnitude can mitigate an enormous range of impacts resulting from emissions reductions. Table ES-1 summarizes the cost of compensation for a wide range of impacts and shows the percentage of carbon tax or permit revenues that would be required to provide such compensation. The table illustrates that it is economically feasible to offset even large and very unlikely impacts. Under the most pessimistic assumptions, about two-thirds of the revenue from pollution charges can completely compensate displaced workers, declines in wage growth, and investor loss. This means that at least one-third of the revenue (or $10-100 billion) would remain to be used for other socially beneficial endeavors (e.g., subsidies for investment or research in clean technology, a further reduction of taxes on labor and investment).

Table ES-1: Maximum Estimated Impacts on Workers

 

Type of Impact Range of Maximum Estimated Impacts Approximate Annual Cost (Billions) Approximate Annual Cost (Percent of low-high estimates of annual revenue in2010 from a pollution charge)
Displaced Workers 50,000-300,000 1-6* 3-2
Decline in Real Income 1-14 % price rise 7-95** 23-32
Investor Loss Due to Decline in Market Value of Assets "in the ground." 5-50 % decline in the market value of US Energy Companies 5-90* 17-30
Total Potential Cost Not Applicable 13-191 43-64

Policies to slow climate change must charge emitters for their greenhouse gas emissions. Giving away emissions allowances reduces the ability of the government to provide compensation or make social investments. Without charges for emissions, broad-based taxes would be required to fund compensation, which complicates the fairness question. For example, compensating investors in corporations that supply fossil fuels may be viewed as fair if paid for with revenue from carbon emission charges, but as unfair if paid for with revenue from income taxes.

Further, beyond providing compensation for workers and investors, if used wisely, the revenue from pollution charges could even provide new benefits to workers and investors. Energy company investors could benefit from tax incentives for energy investments or other policy measures that help these companies to diversify successfully. Although some assets will decline in value (e.g., coal in the ground), companies that diversify beyond the sale of fossil fuels may benefit from climate policies that include transition relief or rewards for those companies that act boldly to make the transition.

Climate policies may result in the displacement of some workers in fossil-fuel extraction, processing, and transport sectors, or they may exert a downward pressure on real wages. On the other hand, comprehensive and high-quality retraining might allow displaced workers to benefit from climate policy by enabling them to move from industries that are already declining, or will eventually decline as the "petroleum era" passes, to those industries expected to grow in the 21st Century.

Revenue-Raising Climate Policies are the Fairest for Living Americans

Most public policy impacts are not compensated, but the government provides compensation in some instances, particularly when affected persons have little opportunity or few resources to avoid impacts. Because climate policies affect the U.S. workers and investors in significant ways, compensation is politically likely. But without a revenue stream from carbon emissions, budgetary pressure is likely to cause compensation to be less than satisfactory for most affected parties. Further, revenue raising policies will provide a new source of revenue to fund various forms of social investment.

Although some groups of living Americans may be affected much more adversely than others, simple calculations suggest it is feasible to construct a climate policy package that is fair to all Americans, today. That is, being fair to future workers and investors does not require that we be unfair to some workers and investors today.

The Bottom Line

Failure to adopt climate policy is unfair to future generations if one's ethical starting point is responsibility for the consequences of one's actions. Fortunately, climate policy is affordable for living Americans even under unlikely and unfavorable assumptions. Although some groups of living Americans may be affected much more adversely than others, simple calculations suggest it is feasible to construct a climate policy approach that provides adequate compensation to them and is, therefore, fair to all Americans, today. That is, being fair to future workers and investors does not require that we be unfair to some workers and investors today. We must gather the political will to create fair climate policy. Raising revenue through pollution charges will allow the U.S. to protect the current generation of workers and investors from the impacts of climate policy while protecting future generations from the impact of climate change.

1. U.S. negotiators agreed to reduce greenhouse gas emissions to 7% below the year 1990 level of emissions by the year 2010 under the Kyoto Protocol. Real GDP per capita in this scenario is estimated to grow from $25,600 in 1995 to $30,200 in 2010.

Note: Executive Summary prepared by Paige Brown and Gary Wolff.

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