Workers’ Earnings Losses Due to the Low-Carbon Transition. Theory and Application in a CGE Model

Designing a just transition that leaves no one behind necessitates an understanding of the potential economic costs of this transition for particularly vulnerable individuals. In this article, we analyse the costs of transitioning from high-carbon to less-carbon-intensive sectors for workers. First, we discuss potential reasons for such costs. Second, we employ a microeconomic model to demonstrate that information on the magnitude of these costs can be derived from the empirically observed sectoral labour supply curves. We then illustrate how the system of supply curves can be integrated into a standard Computable General Equilibrium framework. We calculate the potential earnings losses incurred by workers during the transition and compare them to the size of the Just Transition Fund by the European Commission. Finally, we employ the model to estimate the transition costs for Poland. In 2040, the loss for workers due to climate policy is approximately $1 billion, equivalent to 0.5% of total labour compensation. The state could use a Just Transition Fund or allocate a portion of its carbon tax revenue to compensate for these losses, thus reducing the resistance of the most affected workers to more ambitious climate policies.