Welcome back. Today, we discuss the relationship between energy and income distribution, and how the energy transition may affect income distribution in rich and poor countries are like. This is a very delicate subject and it is important to understand it appropriately. We start from the notion that a certain level of energy consumption, of energy availability which may depend on climate or other environmental and socioeconomic factors, is considered an essential part of human life. It is a necessity like food or shelter. So it is considered really non-negotiable so to speak, it's something that must be provided. Therefore, in most advanced economies, the access to energy is considered right. People have a right to have access to energy, at least certain amounts of energy those that are identified with minimal living conditions. Of course there are so many countries in which this right is not guaranteed at all. Because not enough energy is produced to serve all the requirements of all people and accessibility is not guaranteed. So this is at the global level an aspiration. It is one of the sustainable development goals, at the moment it is not guaranteed. The fact that there might be a right to at least minimal supply of energy, is frequently embodied in policies that guarantee lower tariffs for low levels of consumption. So for example for the certain amount of electricity consumption, you have a low tariff and then if you go beyond that you start paying more. So either low tariff for low levels of consumption or cheaper access to energy products such as transportation fuel, especially the fuels that are destined to heating and cooking. So not so much transportation, but heating and cooking in some conditions are considered necessities and therefore, the same diesel that you buy for your car costs more than the heating oil which is essentially diesel that you use to heat your home. In some countries however, even mostly these are developing countries, energy products and fuels including transportation fuels are made available at very low prices. Lower than the international prices and there is no limit to consumption. The price is always low. So in some oil exporting countries that do this, this may represent on the part of the government, the acceptance of somewhat lower income than they would otherwise be able to receive. They sell to their domestic customers at low prices, but they still sell at high prices to the foreign customers. But when it comes to countries that are importing countries, so small insufficient producers such as for example India, providing fuel excessively at lower than international prices becomes an actual burden on the government budget. Because the government has to pay the difference between the international price and the price at which the product is sold to the local population. Practicing low energy prices above a minimum level of consumption ends up favoring rich consumers. So it has a regressive effect on income distribution. Why is this a case? Because in any case in order to consume energy, you need to invest in acquiring the tool that will consume the energy. If you have to benefit from cheap gasoline. You need to buy a car. If you buy two cars and they are large cars, you will benefit more out of cheap gasoline than somebody that buys a small car or even a motorcycle. If you are rich you are able to buy many appliances, several TV sets, dishwasher, washing machines, and so on and so forth, and you will therefore consume much more electricity than somebody who is poor and doesn't have the money to invest in these appliances. So other forms of consumptions such as travel by air may be too exotic in remote distances, this too is open to the rich and not to everybody. So keeping prices for energy low beyond a certain minimum level of consumption, is in fact something that benefits rich and does not benefit the poor. Because the poor in any case does not have much of a chance of benefiting from it. As the income of households grows, also energy consumption increases progressively. But beyond a certain point, we may expect that the consumption of energy will not increase at the same rate as the income of the household. It will not grow in proportion because after you have several cars and all appliances and so on and so forth and you run your air conditioning 24 hours a day and so on and so forth, what else can you do? That's the share of the available budget for each household which is spent on energy, is normally higher for the poor because their budget is low than it is for the rich. Rich households will not devote a large share of their total expenditure to energy. For poor households, although per-capita they consume much less than the rich household, nevertheless the share of their available income which is devoted to energy is higher than that of the rich. What this means is that low prices favor the rich because they have an opportunity to take advantage of it more than the poor, but high prices damage the poor more than the rich because they are more exposed to those high prices and larger share of the income must be devoted to energy. So that's why a minimum level of consumption should be guaranteed at low prices. Because otherwise, higher prices damage the poor more than proportionately. The internalization of the costs of climate change, in other words, imposing a price for carbon emissions on top of the price of energies per se, means inevitably that the cost of energy, the total cost of energy will increase. Although some clean energy sources of electricity may be cheaper than fossil fuels-based ones, if this- If we measure the cost by the cost per kilowatt, which is produced. Nevertheless, the fact is that renewable sources that are non-dispatchable such as wind and solar which we do not control, I've said this several times means that they may not be available when needed. Therefore, we need to keep capacity from other sources. We still need to invest in other sources to make sure that they are available when the clean renewable non-dispatchable sources are not available. In total therefore, we have an increase in the requirements for investment. This increase derives from several factors. First of all, wind and solar, these renewable energy sources are intrinsically more investment-prone than other sources. In essence, the cost of these sources is entirely in the initial investment. While when you run a gas power plant or a coal power plant, part of the cost is for purchasing the fuel, the coal, or the gas. In the case of wind and solar, no, all the cost is on the investment side upfront. So although in total they may cost less per kilowatt produced, nevertheless the cost is for capital, not for running the plant. Then there is also the factor that in order to make sure that we do not emit as much CO_2, we may need to engage in further investment to capture the CO_2 for example. A coal power plant is already something that requires a large initial investment. But if we had carbon capture and sequestration, what do we achieve? We achieve a loss of about 30-35 percent of the useful electricity. For that, we need to invest even more to have the installation for carbon capture and sequestration. So in the end, we end up with a much larger capital investment bill and a lower net useful production. All of these phenomena will mean that the process of decarbonization is one that will increase the capital intensity of providing for energy. So whenever we shift in methods of production from more labor-intensive to more capital-intensive, this means that the equilibrium division of value-added between capital and labor shifts in favor of capital. If we have a capital-intensive economic system, capital will gain more of the pie than labor, which means that investment capital's financiers will be paid more than workers. It shifts income from workers to the owners of capital. In this respect, energy is not different from most other sectors. We have had the process of increasing capital intensity in most sectors with the exception perhaps of a few service sectors, but certainly not all. So there has been a tendency to increase capital intensity throughout the economy. This is one of the reasons of the shift in income distribution in the growing distances between rich and poor in all countries including the advanced countries. So decarbonization is bound to impact negatively on income distribution in the sense of increasing distances. This is not the only cause of this phenomena of worsening of income distribution, increasing inequalities. But it is adding to the effect of other phenomena that are taking place in parallel. Decarbonization will increase inequalities because the use of energy must be rationalized and discouraged, because the cost of climate change must be internalized and it was not accounted for until now, because an energy system that is based on a large share of non-dispatchable renewables is more capital-intensive. Finally, because growth may need to slow down to meet decarbonization targets as we have discussed in a previous unit. So the energy transition is certainly not the only cause of growing inequality as we said, but it combines with other causes to make this issue worse. It is possible that the negative impact, political impact of growing inequalities will generate a negative attitude towards decarbonization policies. In particular, it is possible that people will react, resist, and revolt against decarbonization policies if they perceive that they have a negative impact on their standard of living or well-being. That it's not unlikely because people are especially sensitive to certain changes in prices and the price of energy is one of those. So if they realize that decarbonization means that they might have to pay more for their energy, they are bound to react negatively. So we have sometimes the concept of green new deal. This is something that has been recently proposed especially in the United States, and may become a significant political slogan. This is an ambitious vision, and It is in many ways a necessary vision that must be pursued in order to maintain consensus for decarbonization policies. Because if we don't manage to combine decarbonization with less inequality through appropriate policies, then there will be resistance to decarbonization. But realistically, it's difficult to combine decarbonization and decreasing inequality. You need to have a very significant shift towards redistribution policies to make it real, because it won't happen by itself. If you just pursue decarbonization, you will have increasing inequality, not decreasing inequality. So you must accompany decarbonization with policies that are aggressively tackling the issue of inequality and compensate for the negative effect of decarbonization in other transformations. Redistribution policies may take the shape of improving social services for example, such as public transportation, which is part and parcel of the agenda for decarbonization anyhow. But you need to do much more and make it more affordable, or it may involve promising and delivering special grants to the poorer strata of the population so that they are able to refurbish their buildings, reduce heat waste, and facilitate investment in energy saving appliances because otherwise, the poorer families will not be able to do any of this, and we'll only suffer out of higher energy cost. It may involve outright income subsidies, citizens income distribution of money in equal installments to everybody to compensate for the higher cost of energy. This is something that has been done in some oil-producing countries when they decided to increase the price of gasoline and diesel. They compensated the negative impact on the poorest strata of the population by creating a system of grants to each at the end of the month so that in the end, the poor will not be negatively affected. All of this will need to be financed. The problem is that in most cases, in most countries, the governments are strapped with funds. They don't want to increase taxes, and they are constantly facing excess expenditure. So decarbonization is going to be a challenging fiscal proposition for many countries, and it's probably not possible to be achieved unless we accept increased taxation on income and wealth.
