Green Economy Transition: Winners, Losers and Compensation Mechanisms

The Distribution Question at the Heart of the Green Transition

Decarbonisation policies — carbon taxes, phase-outs of fossil fuel subsidies, tighter vehicle emission standards — reduce aggregate emissions. But their distributional effects are uneven and, if uncompensated, risk deepening existing inequalities and generating political opposition that slows the transition itself.

This finding synthesises evidence from policy evaluation studies, computable general equilibrium modelling and household panel data to identify who gains, who bears adjustment costs, and what instruments are most effective at making transitions broadly beneficial.

Sectors and Groups Most Affected

Carbon-intensive industrial workers face the most acute adjustment pressures, particularly in regions where a single sector dominates the local labour market. The analysis identifies 23 European sub-regions where fossil-fuel employment exceeds 15% of total employment and no adequate alternative employer is currently present within commuting distance.

Energy poverty is a second critical dimension. Low-income households spend a disproportionate share of income on energy and are least able to invest in efficiency upgrades. Carbon price revenues specifically earmarked for energy-poverty reduction — as implemented in Austria and Germany — substantially mitigate regressive effects.

Effective Compensation Mechanisms

Three compensation approaches show the strongest evidence base across the studied contexts:

1. Universal climate dividends — returning carbon revenues equally to all residents — are administratively simple and politically popular, and make the tax progressive on net even when the tax itself is regressive.
2. Regional transition funds targeting affected industrial communities address spatial concentration of adjustment costs and have proved effective in accelerating retraining and enterprise diversification when adequately resourced.
3. Progressive energy-efficiency subsidies that prioritise low-income households deliver both distributional and environmental gains simultaneously, reducing energy poverty while cutting emissions.

Interested in applying these findings to your region? Connect with the WISE Horizons policy team.