Climate policy, Public Energy R&D and Income Distribution

This paper investigates the distributive effects of climate change mitigation policies across a panel of 29 OECD countries over the period 1990-2020.We estimate the dynamic impact of a one-standard-deviation increase in the level of the OECD Environmental Policy Stringency (EPS) Index on income inequality indicators from the World Income Inequality Database. To address potential endogeneity in policy adoption, we employ an Instrumental Variables Local Projections (IV-LPs) framework. The paper contributes to the literature on the macroeconomic and distributive consequences of climate action in two main ways. First, building on evidence regarding the role of institutions in enabling effective environmental action, we propose a novel instrument based on global climate-related speeches by central banks, combined with country-specific institutional characteristics. Second, the results show that the distributive effects of environmental policy are highly heterogeneous across instrument types. Market-based climate policies generate regressive, although short-lived, effects. By contrast, Technology-support policies, namely public research and development (R&D) expenditure and renewable energy support, generate progressive redistributive effects and expansionary macroeconomic effects on real GDP and investment, although at the cost of upward pressure on inflation. On the labour-market side, the transmission channels operate through long-term improvements in employment and women’s labour-market participation. Uncovering these heterogeneous effects is essential for designing policies that can secure a “just” socio-economic transition.