Within-country inequality and the shaping of a just global climate policy

Climate change and global inequality are intertwined. First, from a cross-country perspective, poorer countries have less financial capacity to abate emissions and are more vulnerable to climate impacts. Second, within countries, climate damages and mitigation costs tend to fall disproportionately on poorer households, which has implications for the political feasibility of mitigation. Integrated Assessment Models used for global climate policy evaluation have so far typically not considered inequality effects within countries. To fill this gap, we develop a global Integrated Assessment Model representing national economies and sub-national income distribution, and assess a range of climate policy schemes with varying levels of effort sharing across countries and households. The schemes are consistent with limiting temperature increases to 2°C, and account for the possibility to use revenues from carbon pricing to address distributional effects within and between countries. Among these, we explore a "Loss and Damage" scheme, aiming to compensate vulnerable countries for unavoidable damages from climate change. A key finding is that relatively low levels of international transfers can result in sizable improvements in inequality and welfare, due to the impacts on the most vulnerable households within countries. If international transfers are not feasible, our results show that the greatest inequality reductions can be achieved through sub-national transfers and reallocation of abatement efforts across time and countries