Low-Carbon Transition Policies, Skill-Driven Inequality, and Endogenous Political Cleavages

Drawing on the political science literature, we develop a heterogeneous agents macro model that differentiates between left- and right-wing voting preferences in two political dimensions: the economic-distributive (ED) and the socio-cultural (SC) in particular regarding climate change. The model is compatible with the emergence of “ED-left/SC-left”, “ED-left/SC-right”, “ED-right/SC-left”, and “ED-right/SC-right” coalitions, each associated with a tax rate on the skill wage premium and on carbon emissions. Human capital accumulation regarding results in a wage differential that influences production and feedback on inequality. Through induced technical change, taxing emissions impacts the development of carbon-neutral production techniques, affecting output and ultimately feeding political attitudes. We study analytically and through numerical simulations the conditions resulting in the coexistence of multiple stable equilibria and the possible implications for carbon emissions. Three results are worth highlighting. First, when income inequality, captured by the skill premium, is the primary motivation to become more educated, left-wing ED coalitions generate higher inequality than their right-wing counterpart. Second, it is shown that the consensus required to implement a carbon tax is only the first part of the problem. Absolute decoupling requires a sufficiently strong response from technology favouring carbon-neutral production techniques. Finally, our model suggests that the SC dimension matters most under medium levels of inequality. When inequality is very high, as in the pre-war period, ED dominates the debate, and there is a right-wing SC consensus. As inequality fell during the 1950s and 1960s, socio-cultural aspects gained importance. This change led to a situation where “ED-left/SC-left”, “ED-left/SC-right”, “ED-right/SC-left”, and “ED-right/SC-right” stable coalitions became possible, creating a disconnect between education and left-wing support.