8. An effective, fair and equitable transition

This chapter draws on contributions to the horizontal project carried out under the responsibility of the Economic Policy Committee, Public Governance Committee, Environment Policy Committee, and Employment, Labour and Social Affairs Committee.

The transition to net-zero emissions will require transformative changes and necessarily entail significant economic and social impacts. The transition can only be successful and resilient in the long term with strong public support and widespread opportunities for people and firms. Proactive policies are required to ensure that the social and economic implications of net-zero measures are addressed. Nevertheless, even with tailored policy intervention, impacts will not be distributed evenly. As a whole, the net-zero transition is for the benefit of all, insofar as its goal is to mitigate climate change. Still, in relative terms, while the net-zero transition may leave some better off economically, some sectors, workers, and households will be negatively affected relative to business-as-usual.

How these potential impacts are measured is important. First, the net-zero transition involves a policy agenda for the medium term, and systemic shifts in the future may temper immediate impacts. In this way, losses and gains stemming from climate policies can be temporary. Second and more fundamentally, any attempt to quantify and address impacts from the transition must also account for the counterfactual. While the status quo can appear to be a natural starting point for assessment, any losses should be compared to the cost of inaction in the face of major economic and social impacts from climate change or, vice versa, the benefits of mitigation that provide the very rationale for policies for the net-zero transition (Tovar Reaños and Lynch, 2022[1]). Thus, choosing the appropriate baseline is a crucial consideration for policy makers.

Public opinion is a key factor in the ability of governments to enact effective climate policies. Conversely, public opinion can pose a considerable barrier if the impacts of climate policies result in widespread opposition. It is crucial that governments are seen as legitimate, credible actors in this space, a key challenge at a time of declining trust in public institutions and increasing discontent with democracy. Effective communication with the public on the modalities and impacts of climate policies as well as strengthened governance standards, are important to forge long-term consensus for resilient climate action.

Distributional impacts of the transition can be observed in a wide range of dimensions, including income and wealth, jobs and employment, and housing. They can be both direct and indirect. Impacts must be carefully managed in order to maintain public support for climate policies and protect the broader well-being of populations. However, impacts of the transition are highly heterogeneous in their distribution across groups and regions and influenced by myriad country-specific factors. Analysing and addressing these impacts represents another key challenge for policy makers.

The net-zero transition will require transformative changes to economic structures, resulting in major shifts in production and employment patterns, the nature of jobs, and skills needs. These changes will take place in parallel with other ongoing megatrends such as digitalisation, demographic change, and globalisation. Here again, adjustment costs across populations will not be uniformly distributed. As far as possible, countries will need to anticipate complex labour market implications and alleviate them where necessary.

This chapter illustrates how governments can maintain a net-zero transition that balances environmental effectiveness with fairness and equitability, and how these characteristics contribute to a transition that is ultimately more resilient. By focusing on effectiveness, fairness and equitability, this chapter takes a broad approach to the concept of a just transition.

Ensuring the resilience of the net-zero transition requires building and maintaining public support for climate policies. In particular, it is essential for governments to address inequalities and possible economic hardships the introduction of such policies may cause. Failure to do so risks virulent political backlash becoming an obstacle to the transition, as exemplified by the gilets jaunes protests in France and Estallido Social riots in Chile. Current cost-of-living and energy crises have highlighted the importance of these issues and placed them at the top of countries’ policy agendas.

At the same time, these crises, if managed carefully, may also present an opportunity to introduce climate policies. For instance, a carbon tax may face less opposition from consumers who have already had to adjust to higher prices for energy and other goods, provided it is introduced in a timely manner once inflation has begun to decrease. In addition, policies need not occur in isolation and can be managed as part of a package, for example by redistributing revenues generated by environmental taxes. Furthermore, high current prices for fossil fuels may encourage public support for renewable energy sources, which are the lowest-cost energy sources in many countries.

A recent OECD survey of 40 000 people across 20 high- and middle-income countries provides insight into the factors that induce public support for climate policies as well as the conditions that might lead individuals to change their own behaviour (Dechezleprêtre et al., 2022[2]). Three policies in particular formed the core focus of the survey: a carbon tax with cash transfers, a green infrastructure programme, and a ban on combustion-engine cars. The survey found that many respondents view the three policies as environmentally effective but regressive and against their own financial interest (Figure 8.1). In both high- and middle-income countries, a majority of respondents agreed that the three policies would reduce GHG emissions and air pollution. In contrast, few respondents believed that the policies would have positive impacts on the economy and employment, although this share was somewhat higher in middle-income countries. In terms of perceived distributional effects, the three policies were mostly considered regressive except in India, Indonesia and China, where they were viewed as more progressive. Respondents also expressed pessimism about expected financial impacts on their own households, although again with significantly different results in India, Indonesia and China. In both high- and middle-income countries, the most support was expressed for the green infrastructure programme, followed by the ban on combustion-engine cars, with carbon taxes receiving the least support.

The survey found that while certain socio-economic and lifestyle characteristics were correlated with support for climate policies – especially access to public transport – they were weak predictors of respondents’ attitudes to climate policies. Far more important were respondents’ perceptions of policy effectiveness and of distributional impacts. By some distance, the most impactful beliefs were that one’s own household would lose as a result of a given policy (explained 14.6% of variation in responses), that the policy would reduce GHG emissions (14%), that the policy would reduce pollution (10%) and that low-income earners would lose because of the policy (8.3%). Notably, these perceptions had a much greater impact on support for a given policy than beliefs about a policy’s economic effects or perceptions about climate change and its consequences overall.

The survey highlights that the public reacts to the specific modalities of policies. Sources of funding are expected to be progressive. For instance, stronger support was expressed for policies funded by higher taxes on highest-income households than for those funded by reductions in social or military spending, additional public debt, or increases in sales taxes. Equally, the use of revenue generated is expected either to address distributional concerns or further contribute to environmental objectives. For instance, the survey demonstrates that at face value, carbon taxes are extremely unpopular. However, if carbon tax revenue is used to fund environmental infrastructure, subsidise low-carbon technology, or reduce income taxes, carbon taxes generate approximately 70% higher support in high-income countries (for a level of support around 55%) and 25% higher support in middle-income countries (70%). The same is true of carbon taxes with transfers to the poorest or the most constrained households. However, carbon taxes with revenues used to reduce corporate taxes or with equal transfers garner less support.

An experimental part of the survey observed that while showing participants an informational video on climate impacts had only a weak positive effect on policy support, the effects of showing a video about the design and consequences of the three main climate policies were much stronger (Figure 8.2). Effects were strongest on participants who watched both videos. Importantly, all three treatments had large positive effects on respondents’ perceptions of the fairness of the policies, and alleviated concerns about the policies’ distributional impacts. In addition, the effects of the video treatment were observed on support for policies outside of the three policies featured in the Climate Policies video. However, these effects were limited to policies that are closely related, for example carbon taxes, a tax on fossil fuels, and a tax on flying.

The OECD survey on public attitudes toward climate policies clearly demonstrates that providing accurate and easily accessible information on policies to the public is critical to foster policy support and thus ensure a resilient transition. It is clear that the public wants to know how policies work and who can benefit from them, and how those who may lose out can be compensated. It is also important to explain the workings of policies individually, as the extent to which respondents extrapolate information about one policy’s effect on another is limited. If explained in a manner that addresses the three key concerns (environmental effectiveness, effects on one’s own household and effects on low-income households), explanations of policies can be very effective in improving support for climate policies. By contrast, information on the dangers of climate change alone without a corresponding explanation of the policies that can help has only limited impacts on policy support.

The survey results highlight the importance of ensuring a just transition. Concerns for individual economic hardship are important predictors of support for climate policy, meaning that assessing distributional impacts of policies is essential. In addition to policy design itself, another important factor is trust in the government itself.

As mentioned above, governments face the challenge of forging long-term consensus on urgent climate and other environmental measures against a backdrop of declining trust in public institutions and increasing discontent with democracy. Findings from the 2021 OECD Survey on Drivers of Trust in Public Institutions (Trust Survey) (OECD, 2022[3]) shed light on the nexus of climate action and trust in public institutions. The Trust Survey incorporates questions on the reliability of government, including whether people consider their government prepared to deal with systemic shocks such as natural disasters or the spread of contagious diseases. It shows how investing in public governance to deliver more effective policies to fight climate change may pay off in securing more credibility and trust in government. It also demonstrates how measuring people’s trust in climate policies can help inform decision making and strengthen public support and acceptability for green reforms (OECD, 2022[4]).

Public perceptions of government competence are illustrated in Figure 8.3. On average, only 35.5% of people are confident that countries will succeed in reducing their country’s contribution to climate change by reducing greenhouse gas emissions. People may not be confident that public institutions are competent and reliable enough to deliver climate policies effectively, and for long enough, to generate benefits.

Cross-nationally, high levels of confidence in a government’s ability to commit to addressing climate change are positively correlated with trust in government. Analysis from the OECD Trust Survey finds that people’s confidence that the country will reduce greenhouse gas emissions has a statistically significant, positive relationship with trust in national government and, to a lesser extent, local government and civil service. In other words, investing in public governance to deliver more effective policies to fight climate change may pay off in securing more credibility and trust in government. This relationship holds within countries, too: those who are confident that their government can credibly commit to reducing greenhouse gas emissions are more likely to trust their government (Figure 8.4).

Some challenges require more than a reliable and responsive national government – they require the involvement of other actors and partners, and importantly international co-operation. Yet there is still relatively low public support for global co-operation to target such challenges: only around half of respondents call on governments to work together to address climate change. When asked about how to co-operate globally, the most popular response, “joining forces with other governments internationally”, was selected by 43.4% of respondents, on average cross-nationally. The next three most commonly selected answer choices – “engaging citizens on global issues”; “strengthening co-ordination across government offices”, and “strengthening the country’s role in international institutions” – were selected by fewer than one in three respondents.

As the risks associated with climate change become ever more urgent – and as costs increase for diffuse, long-term payoffs – governments must do better in communicating to the public the benefits of co-operation to tackle these challenges. These kinds of issues can only be resolved through global co-operation.

Ensuring stakeholder participation, citizen dialogue and integrity and transparency in climate and environmental governance is crucial to secure public trust and buy-in for green policies. The scale of the transformation required to act on climate and other environmental issues call on governments to revamp stakeholder dialogue and citizen participation. In the past years, France, Germany, Ireland, Luxembourg and Spain have initiated deliberative processes addressing climate-related issues aiming to secure legitimacy of climate-related policies (Box 8.1)

Governments should pay particular attention to strengthening integrity standards in public institutions involved in the design and implementation of climate and environmental policies. The appointment of climate advisory bodies and environmental expert groups should include transparency and integrity safeguards to ensure the legitimacy of their advice. To allow for public scrutiny, information on a group’s structure, mandate, composition and selection criteria must be made available to the public. Such groups also need rules of procedure, including terms of appointment, standards of conduct, and, most importantly, procedures for preventing and managing conflicts of interest (OECD, 2022[5]). To ensure greater transparency around climate-related policies, governments can consider several policy options including strengthened lobbying disclosure requirements and expanding corporate political spending disclosures to allow for increased scrutiny of involvement in climate policies.

OECD evidence shows that the development of public communication campaigns can encourage greater support for and compliance with climate policy across diversified segments of the public and help sustain these attitudes over the long term. The OECD International Report on Public Communication (OECD, 2021[6]) outlines five key principles for effective public communication, namely (i) empowering the public communication function through mandates and strategies that support policy objectives and open government; (ii) institutionalising and professionalising communication; (iii) transitioning towards a more informed communication function; (iv) leveraging digital technologies and data responsibly; and (v) strengthening the strategic use of public communication to counter mis- and disinformation.

The COVID-19 pandemic response has served as an accelerator and testing ground for public communication practices that can achieve these objectives at scale (Alfonsi et al., 2022[7]). Leveraging recent innovations in the field, government communicators can test messaging and deliver highly tailored information to diverse groups in society in support of climate policy. Communication channels and social listening offer a continuous understanding of public discourse and attitudes around those policies, and can help adjust information and messaging based on public feedback.

Some countries are taking steps to revamp public communication to inform and engage with the public, while preventing and reacting to the spread of mis- and dis-information. Scotland’s Turning the Tide campaign and the EU Council’s Taking the Lead on Climate Change campaign provide good examples. Governments can support the timely and effective sharing of information, data and policy options to address disinformation around environmental pressures, notably climate change. Agreeing on common data standards to monitor climate change, proactively publishing unrestricted access data on climate change for analysis and re-use; and identifying the provenance of both trusted and untrusted data sources are among actions governments can take to fight dis- and mis-information on climate change (OECD, 2022[5]).

The distributional impacts of climate policies have an important bearing on maintaining public support for climate policies, but are also fundamental from a well-being and inequalities perspective. The OECD Well-being Framework identifies work and job quality, health, income and wealth, and safety as the four key dimensions of people’s well-being. Policy responses that share the impacts of the transition as equitably as possible are thus important for supporting populations’ broader well-being as well as building public support for the transition (OECD, 2021[8]). The transformative changes required to reach net-zero emissions will have profound effects on labour markets and skills needs, with implications for the work and job-quality dimension of populations’ well-being.

Price-based measures taken by governments, such as carbon taxes, may raise energy costs. The risk that this presents to well-being and inequalities has been particularly showcased by the current energy crisis. Domestic fuels are both necessities and a main source of household-level emissions. When energy prices go up, the lowest-income households may be ill-equipped to draw on savings or to cut back on other expenditures (OECD, 2022[9]; Sologon et al., 2022[10]; Immervoll et al., 2023[11]). Thus, even if the incidence of increased prices is broadly similar across income groups or is progressive (impacting wealthier groups more heavily), energy affordability can remain a concern and vulnerable households may find it difficult to maintain minimum levels of energy use and comfort. Similarly, if segments of the elderly population are required to limit energy consumption for heating and cooling, their health and well-being may be put at risk. Higher taxes on road transport fuels may affect rural residents more than urban dwellers since the former tend to rely more on private cars and have limited access to viable public transport alternatives (OECD, 2021[8]).

This is supported by a recent study for EU countries on the prospective reform of the EU’s Energy Tax Directive and the introduction of an emissions-trading system for the road transport and household sectors (Gore, 2022[12]). The direct impact of these reforms is regressive, with lower-income households seeing a greater welfare reduction. However, impacts differ strongly by characteristics other than household income. Impacts are much smaller for urban households compared to rural households, owner-occupiers are more strongly affected than renters, and women-headed households, single-parent households and households with one older person are generally less affected. These examples illustrate the heterogeneity of impacts across households and the potential for climate policies to have regressive impacts, increase inequality, and worsen key aspects of material deprivation and social exclusion.

A key aspect of heterogeneity between households is their response to carbon pricing. Some parts of the population are better able than others to adjust their behaviour in a way that reduces their economic burden from climate-change mitigation. For some households, adjustments may be impossible, e.g. because they spend most or all of their income on necessities and are unable to cover the short-term costs of reducing their carbon footprint (e.g. by insulating their home or moving closer to their workplace to reduce commuting). Since rebalancing consumption and resource use is the very purpose of carbon pricing, these behavioural dimensions must be reflected in assessments of how the resulting burdens are shared.

Tax and fiscal policy can influence the incidence of price increases by providing preferential tax rates for selected groups of energy users or by introducing accompanying fiscal measures (transfers) when prices rise because of climate policies or other factors. The downside of preferential tax rates is that incentives to cut emissions are blunted for eligible groups. In addition, preferential rates are an implicit form of spending as they forego possible revenue. Direct spending through transfers, on the other hand, can mute adverse impacts on selected groups while preserving abatement incentives (OECD, forthcoming 2023[13]) (OECD, 2022[9]; Immervoll et al., 2023[11]).

While transfers are a superior alternative to price-based measures in principle, implementing them may require innovations in transfer mechanisms. In response to recent energy price increases, governments have typically resorted to broad-based price support measures to shield households and businesses, in part due to the complexity of implementing more targeted measures (OECD, 2022[14]). Existing social and fiscal systems may lack the necessary sophistication to address the highly heterogeneous impact of energy price increases across households (Kalkuhl et al., 2022[15]).

The discussion above indicates the need for careful distributional analysis by governments as they prepare and accelerate necessary climate change mitigation while simultaneously managing impacts on well-being. Two recent OECD country studies reaffirm the importance of these distributional analyses when introducing pricing measures and demonstrate how they could be done (Immervoll et al., 2023[11]) (OECD, 2022[16]). The studies demonstrate that the heterogeneous incidence of carbon taxes requires careful analysis, with effects varying significantly across income deciles and regions but likely also across other socio-demographic categories.

The overall burden of a carbon tax on households’ budgets depends on three factors: their reliance on different fuels for heating and transportation (“direct” effect); their consumption of other goods that give rise to carbon emissions during the production process (“indirect” effect); and their behavioural responses to the price changes that occur. The magnitude of indirect effects can be greater than that of direct effects (Immervoll et al., 2023[11]). This emphasises the need for governments assess not only of households’ fuel consumption profiles but their entire consumption bundles. In addition, behavioural adjustments in response to price signals reduce effective tax burdens and are important determinants of distributional impacts. The responsiveness to price changes differs across goods and households according to households’ propensity and ability to rebalance consumption towards less carbon-intensive (and less costly) products.

Beyond the distributional effects on households’ living costs, there are geographical dimensions of carbon pricing, with variations between rural and urban areas and diversified versus single-industry urban centres focused on heavy industry (OECD, 2022[16]). This emphasises the need for governments to consider the regional effects of climate policies and consider geographically targeted support to counteract adverse distributional outcomes.

Both studies indicate that detailed analysis of distributional impacts can provide governments with important information on how best to use revenues generated by carbon taxes to alleviate distributional concerns. Revenues generated by carbon taxes are substantial. Channelling them back to households allows governments considerable scope to cushion losses and shape the distributional profile as part of a broader policy package, with both studies providing examples of how targeted revenue recycling can result in progressive outcomes.

Similar studies could be carried out wherever climate policies are being proposed and introduced. This can be important for balancing social and environmental objectives, and for ensuring that broader concerns related to well-being are addressed. It can also allow for transparent communication with the public in order to enhance support. Note though that both examples depicted exclusively study the incidence of carbon tax proposals whereas net-zero will require a far broader policy mix.

Lastly, it is important to note that housing represents another important area where the impacts of the transition will not naturally be distributed equally across populations. Housing accounts for a quarter of carbon emissions in OECD countries, making it an essential component of plans to reach net zero. Investments in “green” housing to improve energy efficiency and help mitigate the effects of extreme weather conditions on households are likely to sustain employment in the construction sector. However, these investments are not affordable for all. Housing prices have increased over the past decades, and households are dedicating a larger share of their budget to housing costs than they used to (OECD, 2021[17]). OECD countries can introduce subsidies to building regeneration among other climate policy measures targeting housing. Housing support can also affect the reallocation of individuals across regions. To the extent that residential mobility is linked to labour mobility, restrictive housing policies can delay the transition to net zero by increasing the incidence of long-term unemployment (OECD, 2020[18]; Causa, Abendschein and Cavalleri, 2021[19]). These factors merit serious consideration in government analyses to facilitate the net-zero transition and ensure that its impacts are fairly distributed

The pace of the net-zero transition and the ambition of policies needed to achieve it will transform economic structures, changing production and employment patterns, with considerable labour market implications. The costs of adjusting to these employment shifts will be unevenly distributed across society, leaving some better and some worse off, potentially exacerbating the distributional concerns highlighted above. This exemplifies the challenges faced by governments to ensure that these labour market shifts are not to the detriment of a fair and equitable transition.

The transition to a low-carbon and resource-efficient economy will have a significant impact on jobs. First, in broad terms it will entail a drastic reduction in jobs in firms or “brown” sectors with a high greenhouse gas (GHG) footprint. It will simultaneously increase jobs directly linked to emissions-saving “green” technologies (e.g. renewables). In reality, the picture is more complex. Defining which job is green is challenging, and they may or may not substitute for existing jobs in emissions-intensive firms or sectors; some green products and services may be entirely new (e.g. direct air capture of CO₂). Each new green job can also foster the creation of other non-green jobs locally (Vona, Marin and Consoli, 2019[20]).

In addition to changing the allocation of available jobs across sectors, the transition to a net-zero economy will also entail a transformation in the nature of jobs, with the tasks workers are required to perform and the skills they need to do so changing. For example, the manufacture of combustion-engine vehicles requires a different set of tasks and skills to that of an electric vehicle. Adding further complexity, these shifts will occur in an already rapidly changing job market, with the nature of jobs already changing due to digital transformation, for example.

Beyond the immediate effect of the transition on production and consumption patterns, it will also have indirect effects on the inputs for production. For example, higher energy prices are associated with increasing demand for capital and decreasing demand for labour as the input mix to produce a specific good changes. This elasticity of labour to energy prices, however, varies significantly across studies (Vona, 2021[21]). The extent to which workers are able to switch between sectors and occupations according to these new production and consumption patterns influences the overall effect of the transition on employment and wages. The incidence and pervasiveness of unemployment, in turn, introduces income effects that produce further changes in the demand for labour. Extensive empirical evidence suggests that in most OECD countries, labour market adjustments are not immediate due to rigidities in the labour market such as shortages in the supply of certain occupational or skill profiles or wage-setting rigidities.

The impacts of climate change itself (e.g. extreme weather events, rises in temperatures and sea levels) will also affect labour markets. For example, there may be a reallocation of production and labour away from areas most affected by climate impacts (e.g. from coastal regions prone to increasing storms or sea-level rise). Climate impacts may also affect the productivity of certain sectors such as the farming or forestry sector, shifting labour to other, more productive sectors (i.e. renewable energy construction).

Lastly, other megatrends running in parallel to the net-zero transition, e.g. digitalisation, population ageing and (de)globalisation, also have complex labour market implications. The way these changes in the structure of the economy and society interact with each other can impact the pace of convergence to net zero, and the effect of the transition on jobs, income, and health as a consequence.

The net-zero transition will reduce labour demand in some sectors while increasing it in others. Given the distributional implications of labour market effects and their importance in ensuring that the transition is fair, equitable, and widely supported, quantifying the overall impact of the transition on employment is especially important. Studies that model the introduction of climate mitigation policies predict – under a number of simplifying assumptions – that the net labour market impact will likely be modest in the long run. While certain green sectors will grow at a rapid pace, labour should shift from emissions-intensive to less emissions-intensive sectors in the long run. This will have large impacts on specific sectors but a small aggregate impact on unemployment overall (Chateau, Bibas and Lanzi, 2018[23]). Other estimates suggest that reaching net zero by 2050 could create 30 million jobs globally by 2030 compared to 8 million jobs lost (International Energy Agency, 2021[24]).1

The same limited impact of the net-zero transition on employment is found in partial equilibrium analyses but conclusions can change depending on time scales and level of aggregation at which the analysis is performed (OECD, 2021[25]). At the microeconomic level and in the short run, stringent environmental regulations are found to reduce employment in energy- and pollution-intensive industries but effects are small and do not seem to persist in the long run (Dechezleprêtre and Sato, 2017[26]) (Ferris, Shadbegian and Wolverton, 2014[27]).

Inference from past evidence, however, should not be cause for complacency. Past policy changes and reduction efforts have been gradual and their impact on employment may not be a good guide to the impact of much larger or more rapid changes. The same modelling exercises above, furthermore, show that large and sudden changes in climate policy can produce large employment losses (Chateau, Bibas and Lanzi, 2018[23]). The extent and pace of employment adjustment is also affected by a number of labour market policies and by the extent to which policies can alleviate the regressive impacts of climate change on households’ income. This exemplifies the need for careful labour market policy planning and design to accompany climate policies, ensuring that the net-labour market effects remain minimal, and the negative distributional outcomes of labour market shifts are addressed.

A manageable net aggregate employment impact of climate change and climate policy can still imply substantial labour market changes across sectors, with a considerable number of workers needing to change jobs and entailing considerable distributional implications. Such reallocation of workers can take different forms:

  • Sectoral transitions. Workers in emissions-intensive sectors or industries or ones that are especially exposed to climate change may need to move to other sectors or industries. Such shifts can have further indirect effects on other sectors that are not necessarily emissions-intensive or vulnerable to climate impacts via input-output linkages.

  • Occupational transitions. Some particular occupational profiles may progressively lose employment if they are typical of emissions-intensive industries or those vulnerable to climate impacts. One such example are coal miners, who are decreasing in number with the progressive phasing out of coal use for energy production.

  • Regional transitions. The geographic impact of this transformation may be highly uneven, considering the geographical concentration of certain emissions-intensive activities (e.g. mining) or those more exposed to climate impacts. Other regions, conversely, can benefit disproportionately from the creation of “green” jobs, e.g. regions with considerable renewable energy potential.

  • Employer churning. Lastly, employment may shift within sectors and regions but also across firms as emissions-intensive firms are substituted by firms producing comparable products but without the associated emissions or resource use. Indeed, technology adoption is uneven across firms, even within narrowly defined sectors of production. Thus, workers may need to seek employment in “greener” firms.

Lastly, the likelihood of these transitions (as well as those from and into unemployment) are affected by the alignment of skills and knowledge between workers and the requirements in jobs that emerge from the green transition, as developed further below.

As the skills required for jobs adversely impacted by climate change and climate policies are usually not completely transferrable to new jobs in low-carbon sectors and industries, workers in transition may have to adapt their skills set to fulfil the requirements of the destination job. Skills gaps and shortages are already recognised as a major bottleneck in a number of sectors such as renewable energy, energy and resource efficiency, renovation of buildings, construction, environmental services and manufacturing (OECD, 2020[28]).

Understanding which skills are or will be in stronger demand, however, is not straightforward. The urgency of the transition imposes new challenges, and past evidence may not be informative for the future, considering the scale and scope of the net-zero transition. Limited evidence exists on the type of skills that are most complementary to (or substitute for) “green” technologies and production processes. Similarly, evidence that the net-zero transition is skills-biased (i.e. production requires high- rather than low-level skills) is still limited (Marin and Vona, 2019[29]). Some evidence points to most job creation and reallocation being concentrated among mid-skill occupations.

The limited existing evidence concludes that the net-zero transition requires both technical skills that are specific to green industries but also transversal skills such as management skills, skills in innovation and change management and communication skills (OECD, 2014[30]) (Vona et al., 2018[31]). Many if not most of the skills in demand for the net-zero transition therefore do not seem specific to “green” jobs only. There may be some skills that are more frequently relied upon as a consequence of climate change and climate change policies, but these may also be present in other jobs.

The labour market impact of the climate transition will likely be unequal. Many workers will benefit from new job opportunities and potential earnings growth in expanding industries. Others working in shrinking emissions-intensive industries, risk unemployment and may need to reskill. Job displacements often entail some form of adjustment costs, including long-term earnings losses (Walker, 2013[32]) (McKibbin et al., 2009[33]).

The distributional impact of labour market shifts disproportionately affects low-skilled workers who face above-average adjustment costs, as lower levels of education and competencies are crucial barriers to reskilling and job mobility. Generally, low-skilled workers tend to participate in training less than high-skilled workers, and display lower motivation to train (OECD, 2019[34]). This may be especially constraining if the climate transition imposes a disproportionate burden of training on the low-skilled, as for instance in the case of a skills-biased transition (with “brown” industries characterised by relatively low-educated workforce whereas “green” industries require higher-level skills).

Beyond skills levels, research has consistently shown that older workers tend to experience greater adjustment costs following job displacement, including because of the higher cost of reskilling. Furthermore, existing evidence shows that when older workers are displaced, they are likely to be out of work longer, and, if they find a new job, replace less of their former wages than their younger counterparts (OECD, 2018[35]). Older people are also more exposed to the consequences of climate change itself, which will occur in parallel to the shifts initiated by the net-zero transition. Excess heat-related mortality and health risks related to pollution increases with age. Older people’s decreased mobility and changes in physiology and often more limited access to resources limit their adaptive capacity in case of climate change.

The labour market impacts of the net-zero transition are also unevenly felt by different genders. Some of the most carbon-intensive industries (e.g. mining) employ disproportionately more men than women. Female employment in occupations related to science, technology, engineering and mathematics (STEM) is low as is female entrepreneurship. Labour demand in both of these areas is projected to increase along the transition. In addition, although in general better represented in the renewable energy sector than in the traditional energy sector, they mostly hold non-STEM positions (OECD, 2020[36]). A gender-sensitive transition strives to understand how business and policy makers can bring women into green jobs. Furthermore, women’s empowerment and leadership in the energy sector could help accelerate the transition to a low-carbon economy by promoting clean energy and more efficient energy use as well as help to tackle energy poverty (OECD, 2021[37]).

As mentioned already, employment in emissions- or pollution-intensive industries is often geographically concentrated. Indeed, within-country regional variation in emissions is larger than between countries (OECD, 2021[38]). As such, labour market shifts may have important regional and local implications and may exacerbate regional inequalities. For example, the high-tech and knowledge-intensive nature of many “green” jobs may further marginalise rural and industrial areas in favour of de-industrialised urban centres.

The same holds true for the impact of climate change itself, either in the form of extreme weather events or because of the regional specialisation in activities that are sensitive to climate changes (e.g. tourism, agriculture, energy production) (OECD, 2020[39]). Moreover, insofar as climate change affects disproportionally the productivity of sectors that are prevalent in rural areas (e.g. agriculture, fisheries) while high-tech and knowledge-intensive employment concentrates in urban areas, the urban-rural divide may be exacerbated (Hsiang et al., 2017[40]). Rural households are also more affected by rising fuel costs because they are more car-dependent (Joyce et al., 2022[41]), but less so by air pollution and rising temperatures (OECD, 2021[42]).

The transition to net zero needs to be managed alongside other megatrends such as the digital transformation of production and population ageing. These changes themselves come with important labour market implications, interacting with the net-zero transition in ways that affect the overall pace and scope of the transition, both negatively and positively.

For both the net-zero and digital transitions, technology adoption and innovation foster the reallocation of labour away from some occupations and sectors; stimulate the creation of new jobs and professional profiles; and change the task composition and skill requirements of (some) jobs. Digitalisation will enable savings generated by firms that automate parts of production or adopt artificial intelligence technologies to be reinvested in “green” technologies, thus expanding employment in “green” jobs. At the same time, increasing automation is a clear challenge for labour markets and may be accelerated if many “green” jobs are automatable. In this case, the coexistence of both structural changes can raise unemployment and exacerbate voters’ resistance to climate policies.

Demographic change poses a significant challenge to the net-zero transition. Ageing and lower fertility are projected to shrink the size of the working-age population and thereby labour force. Older workers, moreover, are less likely to engage in reskilling activities, including those that enable their reallocation towards “greener” jobs. Lastly, several studies show that, currently, older adults are less inclined to sacrifice part of their income on behalf of a clean environment than younger adults (Stokes, Wike and Carle, 2015[43]). While increasing awareness of the climate crisis among younger adults now may mean that they may have different attitudes when they grow older, the demographic shifts towards ageing populations is nevertheless an important factor.

Carefully designed policies can enhance the adaptive capacity of labour markets and protect those most adversely impacted without wasting public resources, all while preserving or strengthening the economic incentives to achieve net zero by 2050. In line with the OECD Jobs Strategy (OECD, 2018[44]), the structural adjustment pressures resulting from the net-zero transition should reconcile employment flexibility and security by securing workers’ employability and income rather than their jobs, and fostering resilient and adaptable labour markets.

A well-functioning labour market is a prerequisite for a successful net-zero transition. Workers – and in particular those in emissions- or pollution-intensive jobs – should be able to shift across jobs without long periods of unemployment in order to meet rising demand in low-carbon sectors. Similarly, opportunities for the unemployed can only be created if employers have the right incentives to hire, create new ventures or possibly relocate their business elsewhere.

The efficiency of this process of reallocation is largely determined by the functioning and regulation of financial, housing and product markets, including through policies that affect entry and exit of firms. Labour market regulation can enable the development and diffusion of new “green” technologies if they do not unduly prevent firms that lead in the development of green technologies from growing and gaining market shares. Labour regulation should also be supportive of the creation of new firms, considering that business start-ups account for a large share of new technologies, in particular breakthrough innovations.

A key role in determining the rate of reallocation away from emissions-intensive firms or sectors is played by employment protection provisions (EPL). A balanced approach to employment protection does not prevent job reallocation by excessively increasing termination costs for the firm but still protects workers from unfair hiring or firing practices and the destruction of viable worker-firm matches (OECD, 2018[44]). By preventing excessive turnover, job protection can ease resistance to change in the workforce. It can support the adoption of new technologies and innovation, and engagement in training, which in turn can accelerate the restructuring of production where needed. It is also important that the quality of green jobs is emphasised so that the net-zero transition is not perceived as transitioning workers towards low-quality jobs.

At the same time, workers’ protection should not hamper the reallocation of workers away from emissions- or pollution-intensive activities when these are downsizing because of climate policies. A balanced approach to EPL should be reflected in the system of benefits and transfers that protects workers in case of job losses. Relatively generous unemployment benefits can co-exist with less stringent dismissal regulation and at the same time mitigate voter resistance to climate policies among displaced workers.

Other labour market institutions can support the mobility of workers between firms by removing barriers to and strengthening incentives for job mobility. Over-restrictive occupational licenses, for instance, by imposing too-high standards of competence to practice for pay would unnecessarily limit labour mobility by impeding workers seeking to adjust to the net-zero transition. Other provisions can enhance labour mobility by reducing labour market concentration and monopsony power. Policies that directly limit concentration or counteract uneven employer power in the employment relationship include an expansion of the scope of action of antitrust authorities; the investigation of mergers and no-poaching agreements; and a renewed effort to legislate these phenomena. It would also include strengthening collective bargaining (Araki et al., 2022[45]). Lastly, removing obstacles to geographical mobility can also expand workers’ options. First-order tools in this sense are housing policies such as rental regulation, land-use and planning reforms, taxation on housing purchases, and investments in social housing (OECD, 2021[46]). Public investment programmes, and improvements in healthcare and transport policies in a region (Causa, Abendschein and Cavalleri, 2021[19]) should also be considered.

Well-functioning collective bargaining institutions, particularly when associated with high coverage, can also accelerate the net-zero transition. Collective bargaining can foster innovation in the workplace and skills development and skills use. Moreover, OECD work on displaced workers highlights the significant role that collective bargaining, in particular, at the sectoral level, can play in helping displaced workers back into good jobs (OECD, 2018[35]). Lastly, by contributing to improved working conditions and remunerations, collective bargaining can ease the risk of political backlash, and accelerate the convergence towards net zero. As sectors differ in their needs and preparedness to tackle the green transition, sector-specific approaches to collective bargaining are reasonable and relevant. However, the uneven cost of climate policies across sectors can also generate sector-specific resistance to change and demands for specific support. A cross-sectoral approach to social dialogue at the national level can help design equitable measures of government support for the transition of the most affected workers and negotiate new regulations.

Jobless individuals who are marginally attached to the labour market often face barriers that prevent them from finding suitable jobs or discourage them from actively seeking work. Active labour market policies or programmes (ALMPs) ensure that workers and firms can adapt quickly to changes brought about by the net-zero transition. However, current active labour market programmes do not generally have a specific focus on green jobs or skills, whether that means supporting the retraining of workers into “greener” jobs or the absorption of unemployed individuals into “green” jobs. This may be beginning to change. In several EU Member States, public employment services (PES) have been involved in identifying green jobs and greening occupations and establishing corresponding occupational profiles. The experience of these countries shows that close co-operation with other partners – including social partners – is important as it can lead to an easier identification of prospective job opportunities and transferable skills (European Commission, 2021[47]).

Active labour market policies can also be used to support workers who have lost their jobs due to the transition, i.e. workers in emissions-intensive industries. While supporting these vulnerable workers is an essential component of ensuring a fair and equitable transition, defining who fits into this “vulnerable” category is difficult. While some industries and occupations can clearly be considered emissions-intensive, or “brown”, others may be more difficult to place, and different employers in the same sector may use technologies of different emissions intensity. Moreover, the downsizing of an emissions-intensive company may have regional spillovers, calling into question whether workers in satellite activities that are potentially less emissions-intensive should also receive assistance. Lastly, not all workers in emissions-intensive activities need the same level of assistance if their skills set is transferrable or already in demand on the labour market.

Lastly, the structural transformation of the labour market imposed by the net-zero transition strengthens the need to co-ordinate ALMPs with well-designed tax-and-benefit systems. These decrease displacement costs by providing income support during the period of unemployment and effective re-employment services.

Labour market policies for a successful net-zero transition should ensure that workers are equipped with the right skills to thrive in the transforming labour market. Upskilling and reskilling can be strengthened to ensure a smooth transition of workers across jobs (within the same firm or outside) or to adapt their current job to the needs of the climate transition. In the short run, government-supported training programmes for individuals and firms can help reduce skill shortages.

Targeted training programmes are more effective than broad training programmes. However, strategies, policies and initiatives that focus explicitly on green skills and employment are still rare (Cedefop, 2019[48]).2 Countries need high-quality labour-market information systems that track emerging skills needs. Countries also need that information to be shared with labour market actors, policy makers, and training and education providers. OECD (Forthcoming[49]) describes effective strategies to leverage information on skills needed in a low-carbon economy into relevant policy actions.

Training policies in the net-zero transition can be more effective if they include reaching out to potential learners and guiding them in their choice of training course and potential new jobs. They should also call for a recognition of individuals’ existing skills and the development of a high-quality market for training providers. In the longer term, new skills required by the net-zero transition will affect the design of curricula in initial education. This can reduce skills imbalances and poor school-to-work transitions.

Vocational education and training (VET) is particularly well-placed to support the net-zero transition. Because of its close link to the world of work, VET develops and delivers curricula that match market needs and promote work-based learning. The skills acquired through vocational training are also well-suited to activities such as tooling up, and developing prototypes and testing, all of which are needed to develop and diffuse the radically different products and processes a net-zero transition entails and make incremental improvements to existing ones. VET systems must be able to anticipate new skills needs and adapt curricula quickly enough to avert significant skill mismatches.

Lastly, educational institutions should provide the foundational knowledge and skills to identify and resolve environmental challenges, and shape attitudes and behaviours that lead to individual and collective action. PISA 2018 reveals that most countries already deploy curricula that include climate change and global warming but that this does not translate into uniform acquisition of environmental sustainability competences. Family, society, and education institutions complement curricula in developing these competencies. Schools in particular can influence students’ educational and professional aspirations, particularly in STEM disciplines (Borgonovi et al., 2022[50]).

Beyond direct labour market policies, social protection is a crucial building block of governments’ strategies to promote necessary adjustments for the net-zero transition. It is needed to prevent or cushion any damaging disruptions of people’s livelihoods the transition and climate change may produce. Social protection can cushion or prevent income losses, ease short-term credit constraints, and financially help those who are hardest hit to invest in adaptation strategies. And, by making the green transformation more inclusive, especially, as an opportunity to escape poverty, social protection can help ease voter resistance to mitigation efforts.

Past lessons on the generosity and transitory nature of unemployment benefits show that benefit systems should be moderately generous and achieve as high a coverage as possible. Generosity, conditional on the rigorous enforcement of mutual obligations, can enhance the success of active labour market strategies by encouraging job search. Conversely, benefit replacement rates for the unemployed that are too high can translate into relatively strong downward wage rigidities; that is, a resistance to wage cuts, especially among low-wage workers (OECD, 2012[51]). This can discourage employment, in particular among workers with low educational attainment or limited employment experience.

Achieving net zero by 2050 requires important changes across society and the economy. A resilient fair and equitable transition requires strong and widespread public support for ambitious action and fairness in how it impacts different groups. This is a key challenge for governments, with multiple angles: introducing policies that make credible progress towards environmental objectives; ensuring trust in government itself; addressing and communicating on the distributional effects of climate policies; and assessing and acting on important labour market shifts. Moreover, the impacts of climate policies on populations are widespread and complex, intersecting with other megatrends, including digitalisation and demographic change as well as the impacts of climate change themselves. Reasonably flexible employment and social policies based on careful analysis will play an important role in facilitating the low-carbon transition and maintaining strong public support for climate action.

Impacts on different populations can be limited if sufficient investment is made to ensure resilience to climate impacts. Financing accelerated action in the near term can help ensure an orderly transition, which may help keep adjustment costs and distributional impacts down for different populations. In this way, ensuring alignment of finance with net-zero goals and embedding resilience to climate impacts will be important for ensuring that the transition itself is fair, equitable, and resilient.

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Notes

← 1. All these estimates account for differences between “green’ and “brown” industries in capital-labour intensities and in intensity in labour of different occupational profiles.

← 2. There are, of course, examples of training programmes that target green skills. The French public employment service (Pôle Emploi), for example, monitors green developments and directs clients into green job opportunities.

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