Carbon pricing is among the most prominent policy instruments being used or considered by governments to reduce emissions today. Proponents argue that carbon pricing may allow us to reach internationally accepted temperature targets at minimal cost (Borissov et al. 2019, Gollier and Tirole 2015, Rausch et al. 2011).
However, most studies suggest that carbon taxes will negatively affect output and could be regressive (Grainger and Kolstad 2010, Mathur and Morris 2014, van der Ploeg et al. 2021), though some emerging empirical studies challenge this (e.g. Klenert and Hepburn 2018, Metcalf and Stock 2020, Shapiro 2021). Mitigating factors that can reduce output losses or reduce rising inequality have received substantial attention in the literature, particularly the mechanism for redistributing carbon-tax revenue.
What has received less attention is the mitigating role of policies that promote education quality. Better quality education has the potential to (1) improve the supply skills needed to enable green technological innovation in response to carbon pricing, leading to lower output losses and higher reductions in carbon emissions; and (2) reduce inequality resulting from carbon pricing by ensuring that ‘green’ skill acquisition is accessible to all.
Emerging research suggests that green technological change relies on human capital. For example, the role of education and skilled labour for the transition to green growth in the report of the Commission on Carbon Pricing (Stiglitz et al. 2017) explains that production using clean technologies is human capital-intensive so education decisions become closely interlinked with the energy transition (Yao et al. 2020). At the same time, shortages of skilled labour may constrain the decarbonisation process of an economy (OECD 2017). Human capital has also been linked to firms better adapting to climate change and environmental regulations (Lan and Munro 2013, Pargal and Wheeler 1996).
Carbon pricing – through its impact on human-capital accumulation – may not only be the cornerstone of climate policy but may also act as a development policy, fostering technology switches and education of the labour force. However, if green technological change relies on higher-skilled workers and, as a result, is skill-biased, then the increased demand for higher-skilled labour resulting from carbon taxes may further widen the earnings gap between high- and low-skilled workers.
In a recent paper (Macdonald and Patrinos 2021), we consider how education quality interacts with carbon pricing’s effect on emissions, output, and wage inequality. Education quality – as a determinant of the elasticity of skill supply in the economy – may act as a mitigating factor both for the impact of carbon pricing on emissions reduction and on economic outcomes, including wage inequality and output.
This argument is parallel to skills and automation: if automation complements higher-skilled workers’ productivity, then the elasticity of skill supply – for example, through the quality of education – enhances the economic benefits of automation and mitigates its costs (Bentaouet Kattan et al. 2020).
We test the hypothesis that cognitive skills, as an indicator of overall human capital, are associated with a lower reliance on emissions in aggregate production technology and estimate the subsequent mitigating effect of education quality on carbon pricing’s effectiveness and economic consequences, including wage inequality.
Using data on workers’ cognitive skills and their industry’s emissions for 21 European countries, we find that cognitive …….