POVERTY POVERTY AND EQUITY GLOBAL PRACTICE Climate and Equity: A Framework to Guide Policy Action Ben Brunckhorst Ruth Hill Ghazala Mansuri Trang Nguyen Miki Doan1 1 The American Economic Association author randomization tool was used to randomize author names, indicates the author name order was randomized. © 2023 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org Some rights reserved. This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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Washington, DC: World Bank. Translations—If you create a translation of this work, please add the following disclaimer along with the attribution: This translation was not created by The World Bank and should not be considered an official World Bank translation. The World Bank shall not be liable for any content or error in this translation. Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by The World Bank. Third-party content—The World Bank does not necessarily own each component of the content contained within the work. The World Bank therefore does not warrant that the use of any third- party-owned individual component or part contained in the work will not infringe on the rights of those third parties. The risk of claims resulting from such infringement rests solely with you. If you wish to reuse a component of the work, it is your responsibility to determine whether permission is needed for that reuse and to obtain permission from the copyright owner. Examples of components can include, but are not limited to, tables, figures, or images. All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; e-mail: pubrights@worldbank.org. Cover design and layout: reyeswork.com >>> Reducing the impact of climate change on poor and vulnerable households is essential to hastening poverty reduction. In thinking about policies that do this, it is useful to apply the same hazard, exposure and vulnerability framework that is often used to understand the physical impacts of climate change and add the non-climate benefits and costs to households that these policies can also bring. Policies that reduce hazards and vulnerability whilst bringing non-climate benefits—triple win policies—are not very common, but where possible they should be prioritized. Policies that reduce vulnerability and bring non-climate benefits are more common. However, some develop- ment policies that bring non-climate benefits, particularly in higher-income and higher-growth countries, may increase emissions by enough to worsen future hazards, so their emissions impact needs to be managed with com- pensating actions. Policies that reduce the hazards faced by poor house- holds are needed, and the non-climate cost of these policies on poor people should be minimized or compensated where it cannot be avoided. POVERTY AND EQUITY GLOBAL PRACTICE NOTE 3 >>> Poverty reduction and climate change are intricately linked Lifting people out of poverty requires helping households to acquire and use capital—fi- nancial, physical, human, social, and natural—and ensuring that they earn a good return from it.1 The livelihoods of poor households are often based on the use of natural capital, such as farming, pastoralism, or fishing. At the global extreme poverty line, 81 percent of households live in rural areas (compared with 51 percent of the population globally), and 62 percent are predominantly engaged in agriculture.2 Climate change, characterized by higher temperatures, rainfall extremes, and storms, al- ters the natural capital and thus especially affects the ability of poor people to earn an in- come. Unfortunately, these changes are projected to be more severe in places where there is more poverty (figure 1). FIGURE 1 – Higher temperatures will affect the world’s poorest 10 (density, 108 human-months per °C) Additional human-months per year 5 0 -5 -10 0 10 20 30 40 Monthly mean temperature (°C) Richest tercile Middle tercile Poorest tercile Source: Hsiang, Oliva, and Walker 2019. Note: Graph shows changes in the amount of time the global population is exposed to temperatures arising from “business as usual” warming by 2100 for terciles of the global income distribution. This is not the only reason why climate change is particularly challenging for poor house- holds. The lack of capital that accompanies a life in poverty makes hazards more costly. Inadequate insulation, lack of weatherproofing, and substandard construction materials are common characteristics of houses inhabited by poor households, rendering them more sus- ceptible to weather extremes (figure 2, panel a). Because poor people often live in remote 1 Lopez-Calva and Rodríguez-Castelán 2016 2 World Bank 2020, 2022b POVERTY AND EQUITY GLOBAL PRACTICE NOTE 4 locations, the prices of the goods they buy are more likely to be affected by local weather events. They are less likely to be able to rely on savings, access to credit, or insurance to manage their losses of income or assets (figure 2, panel b); less likely to be covered by so- cial insurance; and less likely to be able to switch to other livelihoods because of low levels of education, financial resources, and market access. As a result, poor households often cope with shocks by depleting the few assets they hold, which turns temporary shocks into permanent losses. The subtler welfare impact occurs not when disasters strike but in the costly behavior driven by the anticipation of shocks that households are ill-placed to cope with. Although quieter, in some contexts, this can be the larger constraint to accelerating poverty reduction. One study found this to be twice as large an impact on income growth, and ten well-identified studies across contexts show that when households have better access to climate risk management instruments, there is a 15-30 percent increase in investment regardless of whether shocks occur.3 FIGURE 2 – Climate hazards are costlier for those at the bottom of the income distribution a. In Ghana, households in Accra are equally b. In Uganda, drought produces greater losses exposed to flooding, but the poorest are in income and consumption by the bottom the most affected 40 percent 50 25 Percent of households Percent reduction 40 20 30 15 20 10 10 5 0 0 Poorest 2nd 3rd Richest Crop income Consumption quartile quartile Affected by flood Bottom 40 percent Lost at least 10 percent of assets Top 60 percent Source: Panel a: Erman et al. 2018; panel b: World Bank 2016. The “hazard, exposure, and vulnerability” framework Reducing the impact of climate change on poor and vulnerable households is essential to hastening poverty reduction. When it comes to thinking about policies that do this, it is useful to use the same hazard, exposure and vulnerability framework that is used to un- derstand the physical impacts of climate change.4 Figure 3 summarizes this framework. The hazard is the negative climate-related event that affects people based on where they 3 Elbers, Gunning, and Kinsey (2007) on growth impact. Ten well-identified studies: Mobarak and Rosenzweig (2013) for rainfall index insurance in India; Elabed and Carter (2014) for area yield insurance in Mali; Karlan et al. (2014) for rainfall index insurance in Ghana; Cai et al. (2015) for swine insurance in China; Cai (2016) for ar- ea-yield insurance in China; Fuchs and Wolff (2016) for rainfall index insurance in Mexico; Jensen et al. (2017) for livestock insurance in Kenya; Hill et al. (2019) for rainfall and area yield insurance in Bangladesh; Stoeffler et al. (2020) for area yield in Burkina Faso; Bulte et al. (2020) for multiperil crop insurance in Kenya. 4 IPCC 2022 POVERTY AND EQUITY GLOBAL PRACTICE NOTE 5 live (exposure). Vulnerability captures how much a given negative weather event affects a household’s income or well-being. As noted, poor households are particularly vulnerable to weather hazards because they disproportionately rely on natural capital to earn income and because their lack of other assets makes it much harder to manage the impacts of a weather hazard. Policies are needed in each of these areas. The probability distribution of hazards in the future can be altered through mitigation policies. An example is carbon taxes, which re- duce emissions, particularly in high-emitting countries.5 However, other policies, such as those that encourage increasing tree cover, can also bring more immediate changes in local weather conditions.6 Exposure can be altered by policies that enable households to move themselves or their as- sets to locations less affected by hazards. Policies that change a household’s vulnerability to hazards range from those focused on adaptation, such as encouraging households to invest in water management and soil quality or in better-quality housing, to more general develop- ment policies that increase the capital of poor households, thereby allowing them to better cope with climate shocks or earn more income from activities less affected by hazards. For example, increasing the quality of education, building better roads that connect households to markets, improving city planning, adopting early warning and evacuation systems, or facilitat- ing financial inclusion can all contribute to reducing a household’s vulnerability. FIGURE 3 – Understanding climate impacts: The hazard, exposure, and vulnerability framework The propensity or predisposition to be adversely affected. Vulnerability encompasses a variety of concepts and elements, including sensitivity or susceptibility to harm and lack of capacity to cope and adapt. Vulnerability Risk (Impacts) The presence of people; livelihoods; species or ecosystems; environmental functions, services, and Hazard Exposure resources; infrastructure; or economic, social, or cultural assets in places and settings that could be adversely affected. The potential occurrence of a natural or human-induced physical event or trend that may cause loss of life, injury or other health impacts, as well as damage and loss to property, infrastructure, livelihoods, service provision, ecosystems and environmental resources. Source: IPCC AR5/6 5 For example, see Rafaty et al. (2021); for Europe, Lin and Li (2011); for the United Kingdom, Martin, de Preux, and Wagner (2014); for Canada, Rivers and Schaufele (2015) and Metcalf (2019); and for Sweden, Andersson (2019). 6 See, for example, Harlan et al. (2006), Schwaab et al. (2021), and Ziter et al. (2019). POVERTY AND EQUITY GLOBAL PRACTICE NOTE 6 Conceptualizing the welfare impacts of policy actions With this framework in mind, one could conceptualize the welfare impacts of climate actions as the benefits arising from improvements in the probability distribution of hazards or as a reduction in exposure and vulnerability. Climate actions can also have welfare implications beyond this framework about climate impacts. They could carry a cost or bring an additional benefit that directly impacts welfare. This could be an actual cost to households or a cost in terms of opportunity cost when mon- ey is not used for other purposes. For example, carbon pricing may reduce the net return earned from carbon-intensive livelihoods and so, in the absence of policies that enable a transition to renewable energy or revenue recycling, may hurt welfare. Similarly, carbon border adjustment taxes in one country or region could reduce exports from, and thus the earnings on, the affected production activities in other countries or regions. In addition, in view of constrained public resources, financing the investments in green technologies or spending on disaster recovery could come at the cost of reducing resources for human cap- ital development or infrastructure improvements. However, climate actions can also bring benefits. For example, investments in health can reduce vulnerability to climate shocks and increase an individual’s productive capacity and income. Figure 4 summarizes the welfare impacts of a climate policy on an individual through three main channels: hazards, vulnerability, and other benefits or costs to households. In the figure, changes in a household’s exposure and vulnerability are labeled simply vulnerability for ease of exposition. The valuation of any policy will vary across people, and it cannot be assumed that the impacts on hazards and vulnerability or other direct effects on welfare are uniform across a population. Some households may experience large welfare gains from a climate action, while for others the gains could be smaller, especially if the cost to these individuals is high. The total social welfare impact of a policy on a society will be the sum of the welfare impacts on each person across the welfare distribution, taking into account social welfare weights. FIGURE 4 – Welfare impacts of a climate policy Policy-induced change in welfare cost of climate shocks Policy-induced change in welfare resulting from Hazard Vulnerability other changes in assets or in environment, Welfare social, and impacts economic of policy contexts The benefits of policy actions are often realized long after investments are made. The timing of policy costs on households can be different, especially where policies increase prices or require upfront investments but only yield benefits—even if large—later. A policy has an impact in the near term (today in (tomorrow in figure 5). figure 5), but also in the longer term TOMORROW TODAY Welfare The overall welfare impacts Hazard will take both into Vulnerability Otheraccount. The full beneficial Hazard impacts of Vulnerability climate Other impacts of benefit benefit actions climateon hazards is realized over the long run, or cost whereas the costs of climate or cost are actions more likely to be felt in the near term. However, future benefits are discounted when they policy are valued today. The valuation of today versus tomorrow largely depends on individual POVERTY AND EQUITY GLOBAL PRACTICE NOTE 7 in environment, Welfare social, and impacts economic of policy contexts circumstances. There can be trade-offs across different time periods or generations and among different groups of people. FIGURE 5 – The welfare impacts of climate policy: taking timing into account TODAY TOMORROW Welfare Hazard Vulnerability Other Hazard Vulnerability Other impacts of benefit benefit climate or cost or cost policy Prioritizing triple wins for the poor This framework underscores that policies with positive welfare impacts through all three channels should be prioritized. These are policies that reduce vulnerability, positively im- pact future hazards, and also generate income for households typically at the bottom of the global or country income distributions. Although there are often trade-offs, such “triple win” policies do exist. For example, in the Sahel farmers use low-cost, efficient traditional practices, such as agroforestry and conven- tional rainwater harvesting techniques, to capture rainfall, reduce runoff, and restore soils. Soils play an important role as passive agents in removing atmospheric carbon dioxide.7 Rainwater harvesting and agroforestry have been shown to increase soil carbon seques- tration at the estimated rates of 839 and 1,359 kg of carbon per hectare per year.C.ha-1.yr-1, respectively, in Africa.8 The resulting higher organic content in the soil increases yields and allows farmers to reduce their reliance on chemical fertilizers, further contributing to climate mitigation. In Niger, these practices were found to increase yields,9 which is consistent with the findings of older studies that showed that yields were 16–30 percent higher for farmers implementing these techniques in Niger, with similar yield gains in Burkina Faso.10 These practices also reduce vulnerability to low rainfall, allowing yield increases in low rainfall years.11 Training increases adoption of these practices, and trained farmers then inform their neighbors. As a result, trained farmers are 50 percent more likely to have neighbors adopting the technique than farmers who are not trained.12 This finding suggests that train- ing is a cost-effective way to boost the adoption of profitable and accessible technologies. Further investment in identifying policies that bring triple wins for households at the bottom of the income distribution across contexts is needed. 7 Manning 2008 8 World Bank 2012 9 Aker and Jack 2021 10 Matlon 1985 11 Baquie and Hill 2023 12 Aker and Jack 2021 POVERTY AND EQUITY GLOBAL PRACTICE NOTE 8 Using policy packages to manage trade-offs where they exist Often, however, there are trade-offs across the three channels of impacts, across time or generations, and across groups of people. When they do emerge, it is important to under- stand them and then manage them by considering policy packages. This section highlights two types of trade-offs: (1) policies that reduce vulnerability and increase income growth for poor households—double wins as it were—but could worsen emissions and hazards, and (2) cross-generational trade-offs for poor people. Reducing vulnerability, growing incomes, but increasing emissions Many policies that increase the ability of households to earn income also reduce the impact of extreme climate events on welfare. For example, mobile money spurs development, thereby increasing welfare.13 When a weather crisis strikes, it also allows households to quickly receive transfers or remittances quickly from relatives or migrant family members who live elsewhere.14 Similarly, better access to roads in remote areas increases access to markets, goods, and services, thereby bringing development. When drought reduces local food availability, improved access to markets reduces the impact of this weather shock on local food prices.15 Education increases a household’s ability to earn income, but it also allows households to switch sectors when climate shocks reduce returns in the sector in which they are engaged.16 None of these policies and similar policies would be consid- ered adaptation investments designed to reduce the vulnerability of households to climate events, but they can be highly effective in reducing vulnerability. It is important to note, however, that without actions to reduce the carbon footprint of goods and energy consumed in a country, development policies, like many growth-enhancing pol- icies, can increase emissions. At low levels of growth or for very poor countries, growth in emissions may have a negligible impact on the hazard distribution in the future, but for higher growth rates or for middle-income countries, the growth in emissions is large enough to worsen the hazard distribution in the future at a faster rate.17 Commensurate climate actions will be needed. This is explored in the Pakistan Country Climate and Development Report.18 Figure 6 from this report shows that human capital investments have a large impact on growth and poverty reduction, but they increase emissions when implemented unless accompanied by climate actions to shift energy production to renewable resources and reduce the consumption of carbon. When human capital investments are implemented with policies that shift energy production to renewable resources and increase the cost of carbon, growth and poverty impacts are sustained and emissions fall. 13 Batista and Vicente, forthcoming 14 Jack and Suri 2014 15 Burgess and Donaldson 2010 16 Hill and Mejia-Mantilla 2017 17 Wollburg et al. 2023 18 World Bank 2023 POVERTY AND EQUITY GLOBAL PRACTICE NOTE 9 FIGURE 6 – Growth, emissions, and poverty impacts of investment in human capital on GDP, greenhouse gas emissions, and poverty (with and without a shift to sustainable energy policies), 2025–50 Real GDP GDP per capita % change from baseline % change from baseline 30 30 25 25 20 20 15 15 10 10 5 5 0 0 2025 2030 2040 2050 2025 2030 2040 2050 GHG emissions (MTCO2e) Global lower middle income poverty line % change from baseline % change from baseline 20 0 15 -1 10 5 -2 0 -3 -5 -4 -10 -15 -5 -20 -6 2025 2030 2040 2050 2025 2030 2040 2050 Human capital Human capital Human capital Human capital Human capital + IGCEP + IGCEP + IGCEP + IGCEP + electrification + electrification + electrification + low CT + high CT Source: World Bank 2023. Note: CT = carbon tax and revenue recycling; GDP = gross domestic product; GHG = greenhouse gas; IGCEP = indicative generation capacity expansion plan; MTCO2e = million tonnes of carbon dioxide equivalent. Electrifi- cation refers to the accelerated shift to renewable sources of energy for production and domestic consumption. Human capital policy refers to (1) reducing child malnutrition to under 5 percent by 2030 by expanding access to safe water and sanitation (as per Sustainable Development Goal 6) to all households that currently lack access; and (2) accelerating the fertility decline to replacement levels. Under the modeled scenario, the total fertility rate drops to 2.0 by 2035 and then remains constant at 2.0 until 2050. Under business as usual, total fertility drops to 3.0 between 2030 and 2040 and to 2.0 by 2050. Cross-generational trade-offs for poor people Although some policies focused on altering the probability distribution of hazards can have quite immediate benefits, many will have benefits in the future. Because these policies have a cost now, there is a trade-off between paying now (whether in monetary terms or in growth foregone) and future benefits. That trade-off is different for different people. The improved hazard distribution is often shared across people in a given location, but the cost can be different for different people in the same location. For example, the cost of switching from coal to solar energy is larger for a person who works in a coal mine. Accord- ing to the China Country Climate and Development Report, the profile of people in sectors that contract with climate action will be very different from the profile of those in sectors that expand with climate action (figure 8).19 Also, importantly, for a given cost, the trade-off is larger for poorer people because the marginal utility of an extra dollar of income is higher at lower levels of income, and future benefits are often discounted at a higher rate. 19 World Bank 2022a POVERTY AND EQUITY GLOBAL PRACTICE NOTE 10 FIGURE 8 – Workers in contracting sectors have a different profile (low-skilled males working inland) than workers in expanding sectors (high-skilled males working in coastal urban areas) a. Workers’ characteristics in contracting sectors b. Workers’ characteristics in expanding sectors (% relative to 2018) (% relative to 2018) 100 100 7.5 Coastal 15.3 80 Coastal Skilled 80 Male Urban Male 35.0 51.8 41.6 43.1 63.9 58.3 Urban 60 60 75.6 Semi- skilled Un- 22.8 40 skilled 40 Inland Inland Rural 77.2 Un- 58.4 Female 20 Female 48.2 20 Rural 56.9 skilled 36.1 41.7 42.2 24.4 0 0 Gender Urban/Rural Region Skill Gender Urban/Rural Region Skill Source: World Bank calculations based on computable general equilibrium (CGE) modeling results in 2030 relative to 2018, combined with the average sector characteristics based on the 2018 China Family Panel Survey house survey data. Sector characteristics are held fixed at their 2018 levels. Note: Graphs are showing the distribution of jobs lost and gained, holding job characteristics fixed. These findings have two implications: (1) reductions in hazards should be achieved with policies that impose the least cost on poor people in the present; and (2) where costs on poor people are unavoidable, they should be compensated with instruments that address the intertemporal trade-off. Ideally, the goal should be to identify a policy mix of climate mitigation policies accompanied by compensatory actions that would increase the benefits for poor people today or tomorrow while minimizing the costs. For example, revenue from carbon taxes could be recycled not only to targeted transfers but also to productive invest- ments such as in reskilling and upskilling, facilitating mobility, and reducing market frictions and credit market failures. Such investments actively support poor households in transition- ing rather than just compensating them for losses. Importantly, this framework can also inform discussions of tradeoffs and policy packages at the global level. Policies in one country (or political unit) can impact the probability dis- tribution of hazards in another. Certainly, the overconsumption of carbon in high-income countries has adversely altered the probability distribution of hazards in low- and middle-in- come countries, causing the problem the world collectively faces today. Policies in high- and upper-middle-income countries, paid for by the people in those countries, have the potential to bring benefits for poor people living in low- and middle-income countries by positively impacting the distribution of hazards they face. To manage trade-offs, the same logic underlying the compensation of poor people within countries can be considered when it comes to compensating or supporting poor countries. 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