Achieving both climate goals and poverty reduction

The link between climate change and the wellbeing of people in poverty is becoming increasingly apparent. Hans Peter Lankes, Rob Macquarie, Eleonore Soubeyran and Nicholas Stern consider this interconnected relationship and the role that an integrated policy approach can play in simultaneously tackling climate change and reducing poverty.

Climate action must go hand in hand with poverty reduction if either is to succeed. However, there is a persisting misconception that taking robust measures to tackle and adapt to climate change is at odds with poverty reduction. This not only delays climate action but also muddies decision-making processes, leading to siloed and less effective climate and development strategies that ultimately harm people in poverty.

Our latest research, published in the World Bank Research Observer, demonstrates that such trade-offs are not inevitable, nor even likely at a macro level. Rather, climate change and poverty must be tackled together. However, the right policy mix is crucial to ensure that both objectives are mutually supportive, and there are still some questions to answer – including for the economics profession – on the policy design.

The two aspects of the climate–poverty nexus

Our research considers two aspects of the climate–poverty nexus: the impact of climate change on poverty, and the economic effect of climate action on poverty. We focus on emerging markets and developing economies (EMDEs). While there are various ways to define poverty, we adopt a multidimensional approach that accounts for other facets of wellbeing beyond income, such as education, health, housing and personal security. Under such an approach, economic development does not equate to GDP growth.

It is apparent that, for the vast majority, climate change worsens poverty. A large body of evidence shows that the poorest people, often living in the most exposed and vulnerable conditions, already bear the brunt of climate impacts. This includes increased malnutrition; greater losses from natural disasters across the dimensions of wellbeing; reductions in income from crop and livestock production; work disruptions; uninsured medical costs; high and volatile food prices; and the consequences of potential conflict. Future climate impacts, more unpredictable and often underestimated by economic models, pose even greater threats. For example, one study indicates that climate change could push between 32 million and 132 million more people into poverty by 2030 compared to a world with a stable climate.

Climate change hits different people in different ways. Marginalised identities intersecting with poverty can compound vulnerability to climate impacts. For instance, women and girls are disproportionately affected by climate change compared to men because of their unequal access to resources, high representation in vulnerable sectors like agriculture, and increased burden in securing basic necessities such as food and water.

Despite the evident benefits of taking action to reduce climate change, some decision-makers and analysts have questioned whether the economic consequences hinder the prospects of people in poverty. Some claim that a shift away from fossil energy must be inefficient and costly. Yet, in a world rife with multiple market failures and inefficiencies, action to address these can benefit both the climate and economic development. Furthermore, historical correlations between higher carbon emissions and increased wellbeing are unlikely to hold in the future. The sharp drop in low-carbon technology costs means that fossil fuels are no longer the more cost-effective option for expanding energy access or generating employment (Table 1 shows several estimates of the job and output gains of climate action). Other opportunities include improving material efficiency, further technological breakthroughs, enhancing networks (cities, digital and transport), and reducing inequality, with recent research showing how the climate–poverty relationship could benefit from countries pursuing these.

Economics have often underestimated both the necessary speed and benefits that the transition to a low-carbon, resilient and equitable form of development can bring. Current models particularly struggle to account for the dynamic benefits of innovation, learning and feedback loops that promote institutional and behavioural change, discovery, and economies of scale. As a result, these models generally understate the economic benefits of the transition, both in terms of output and employment, but more broadly for all aspects of wellbeing including health (for example, reduced air pollution benefits can be of great importance for people in poverty).

Table 1. Selected estimates of the output and employment benefits of climate action

Challenges for reducing poverty through climate action

Shifting to equitable, low-carbon and climate-resilient development pathways requires countries to make strategic choices tailored to their particular circumstances. The policy response must go beyond a narrow focus on carbon pricing, valuable though that instrument is, and instead look further and consider a broad range of instruments together with measures to help manage dislocations and adjustment costs. However, there is still a lot to learn about how specific policies, investments and projects add up to positive development and macro pathways.

Our paper identifies four critical ‘vectors’ where context and decision-making matter for the impact of climate action on poverty. These warrant careful consideration, and thus further research is needed, but we need to act fast and learn as we go along. When considering impacts, both the counterfactual and time horizon are important framing: what does the alternative to climate action look like, and how does wellbeing for people in poverty in either scenario change over time?

1.     Resource extraction and fossil fuel phase-out: fossil fuel infrastructure will have to be retired to avoid carbon lock-in and non-climate-related harms such as air pollution. However, the uneven distribution of supply chains across regions in EMDEs means that the impact of the energy transition on wellbeing can be pronounced and threaten whole communities in poverty. Proactive planning, coupled with granular strategy, financing, social protection and adaptive support, can reduce these impacts. This includes, for example, ensuring that low-carbon infrastructure is built before retiring high-carbon industries. Tools and guidance are still needed, especially in EMDEs, where challenges like informal economies, weak social safety nets and low state capacity make a just transition difficult. In addition, while new and expanded value chains in transition minerals can represent a development opportunity, they should adhere to the highest social standards.

2.     Carbon pricing, fossil fuel subsidies and fiscal redistribution: redistributing carbon tax revenues could alleviate the financial burden on low-income households, but the poorest countries have greater pressure on public funds, highlighting the importance of international transfers for reducing poverty. Additionally, although removing fossil fuel subsidies might lead to price rises, reallocating fiscal savings back to households can offset the impact on people in poverty. However, implementing redistributive measures is complex, given the highly individualised nature of compensation, limited coverage of existing transfer instruments, and problems affecting EMDEs mentioned above. All reforms must be culturally and politically suitable and involve public participation to succeed. The advance of digitalisation (e.g. Aadhar in India) can make transfers increasingly simple, cheaper and precise.

3.     Green job creation: the jobs created by climate action (see Table 1) need to be of quality to address multidimensional poverty. Too often in low-income countries, employment does not enable people to escape poverty. To offer a better alternative to a fossil-based path, policies should seek to make jobs accessible to vulnerable people by addressing disparities in skills distribution, the geographic dispersion of new jobs and industries, and gender-based and other intersectional forms of marginalisation. Investing in human capital through education and training needs to align with development strategies, such as providing a suitable mixture of manufacturing and services skills.

4.     Social inclusion and local effects: despite the falling costs of low-carbon technologies, barriers to deployment can persist in low-income countries and communities because of exclusionary upfront costs, limited awareness and financial constraints, calling for targeted innovation and support. Policy design should also be sensitive to the needs and rights of vulnerable people and groups to facilitate the equitable deployment of these technologies (for example, by ensuring fair land rights). Programmes co-created with community input can ensure that their voices are heard and that they can truly benefit from climate solutions.

Conclusion

Setting poverty reduction against climate action, be it mitigation or adaptation, is misguided, and, to the extent that it bolsters the fossil fuel status quo, will ultimately be to the detriment of people in poverty. But while action on each will often be mutually reinforcing, this will not always be automatic. A comprehensive, integrated policy approach is essential for tackling climate change and poverty simultaneously. This approach should catalyse substantial investments across all capital forms – human, natural, physical and social – and integrate climate strategies with equitable growth measures to ease transition impacts on people in poverty.

EMDEs need an estimated US$2.4 trillion annually by 2030 to achieve climate goals (the energy transition, adaptation and resilience, loss and damage, protection of natural capital, and just transitions). Much of this must be mobilised domestically, but robust international financial support to complement domestic resources will be essential. Country-led strategies, informed by resources like the World Bank’s Country Climate and Development Reports and further research, need to recognise the complexity and interconnected nature of climate action and poverty reduction. Given how urgent these challenges are, both policy and research agendas must progress in tandem, each informing and enhancing the other. We already know enough to move strongly and effectively on both fronts simultaneously, and will learn more along the way.