Decarbonisation policies should not impact poor households and SMEs

Small businesses and households could struggle with the short-term impact of energy price hikes due to low-carbon policies from governments, a new study has found.

University of Cambridge researchers combed through approximately 7,000 studies to create an analysis of widely used types of low-carbon policy and compared how they perform in areas such as cost and competitiveness.

They found that decarbonising policies including quotas and feed-in tariffs can be designed and balanced to benefit local firms and lower-income families, but that this is not true for all policies.

Ten policy “instruments” were identified, including forms of investment - targeted R&D funding, for example - as well as financial incentives including different kinds of subsidies, taxes and the auctioning of energy contracts.

The policies also include market interventions such as emissions permits, tradable certificates for clean or saved energy, and efficiency standards, such as those for buildings.

Researchers looked at whether each policy type had a positive or negative effect in various environmental, industrial and socio-economic areas.

When it came to “distributional consequences” - the fairness with which the costs and benefits are spread - the mass of evidence suggests that the impact of five of the ten policy types are far more negative than positive.

“Preventing climate change cannot be the only goal of decarbonisation policies,” said study lead author Dr Cristina Peñasco.

“Unless low-carbon policies are fair, affordable and economically competitive, they will struggle to secure public support - and further delays in decarbonisation could be disastrous for the planet.”

Co-author Laura Diaz Anadon said: “Small firms and average households have less capacity to absorb increases in energy costs. Some of the investment and regulatory policies made it harder for small and medium-size firms to participate in new opportunities or adjust to changes.

“If policies are not well designed and vulnerable households and businesses experience them negatively, it could increase public resistance to change - a major obstacle in reaching net zero carbon.”

For example, feed-in tariffs pay renewable electricity producers above market rates, but these costs may bump energy prices for all if they get passed on to households, leaving the less well-off spending a larger portion of their income on energy.

Renewable electricity traded as ‘green certificates’ can redistribute wealth from consumers to energy companies, with 83 per cent of the available evidence suggesting they have a “negative impact”, along with 63 per cent of the evidence for energy taxes, which can disproportionately affect rural areas.

However, the vast tranche of data assembled by the researchers reveals how many of these policies can be designed and aligned to complement each other, boost innovation and pave the way for a fairer transition to zero carbon.

For example, tailoring feed-in tariffs to be “predictable yet adjustable” can benefit smaller and more dispersed clean energy projects, thus improving market competitiveness.

Moreover, revenues from environmental taxes could go towards social benefits or tax credits such as reducing corporate tax for small firms and lowering income taxes, providing what researchers call a “double dividend” that stimulates economies while reducing emissions.

The researchers argue that creating a “balance” of well-designed and complementary policies can benefit different renewable energy producers and “clean” technologies at various stages.

“There is no one-size-fits-all solution,” said Peñasco. “Policymakers should deploy incentives for innovation, such as targeted R&D funding, while also adapting tariffs and quotas to benefit those across income distributions.

“We need to spur the development of green technology at the same time as achieving public buy-in for the energy transition that must start now to prevent catastrophic global heating,” she said.

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