Why climate action is critical to reducing poverty and what it means for policy tradeoffs

Poverty reduction and climate change are intricately linked

Lifting people out of poverty requires helping households to acquire and use capital-- financial, physical, human, social, and natural—and ensuring that they earn a good return from it.

Poor households are often engaged in livelihoods that rely on the use of natural capital, such as farming, pastoralism, or fishing.

Climate change, and the increase in temperature, rainfall extremes and storms that it brings will have a big impact on the ability of poor people to earn incomes.

Unfortunately, these changes are projected to have a bigger impact in places where there is more poverty.

This is not the only reason why climate change is particularly challenging for poor households.

The lack of capital that accompanies life in poverty also makes hazards more costly. Poor people live in houses that are badly protected from weather extremes. They often live in remote locations, where the prices of the goods are more likely to be impacted by local weather events.  They are more likely to struggle to manage losses to income or assets through savings, access to credit or insurance. They are more likely to hold physical assets that can experience climate damages that financial assets. They are less likely to be covered by social insurance. Actually, they cope with shocks in many cases by depleting the stock of the few assets they hold, which turns temporary shocks into permanent losses.

“Hazard, exposure, and vulnerability” – a framework to help identify key policy actions

Our new policy brief sets out why reducing the impact of climate change on poor and vulnerable households is essential to hastening poverty reduction. This requires policies that reduce hazards, limit exposure and minimize vulnerability, as outlined in the framework that is used to understand the physical impacts of climate change (Figure 1).

Figure 1: Understanding climate impacts: The hazard, exposure, vulnerability framework

The probability distribution of hazards can be altered through emission reduction policies such as carbon taxes, or initiatives that bring more immediate changes in local weather conditions such as increasing tree cover.

Exposure can be altered through policies that ensure people, including newcomers to cities, can settle in safer places.

Policies that change a household’s vulnerability to hazards range from efforts focused on adaptation– such as encouraging household investments in water management and soil quality, or in better-quality housing– to more generally increasing the capital of poor households, allowing them to better cope with climate shocks or earn more income from activities impacted less by hazards.

For example, increased quality education, better roads that connect them to markets, or financial inclusion.

Policy actions targeting both poverty and climate often involve trade-offs across time and people

While action in all of these areas is needed, we outline in the brief that there are some important tradeoffs to note for each of these policy areas with key implications for how they are prioritized. These are trade-offs both across time and across people at one point in time.

To help consider these trade-offs, the schema in Figure 2 can be helpful. The schema shows how a policy can impact welfare by altering the probability distribution of hazards, or a household’s exposure and vulnerability to that hazard (labeled in the figure as simply vulnerability for ease of exposition). In addition to impacting welfare in this way, a policy also has a cost when it is implemented. However, this net cost could be positive if a policy also brings benefits (separate to the impacts on hazard, exposure, or vulnerability already indicated). 

A policy has an impact in the near term, labeled in the figure as today. But also in the longer term, labeled in the figure as tomorrow. The overall welfare impact will take both of these into account. However, future benefits are discounted when they are valued today.

Importantly, the valuation of any policy will be different for different people, and it cannot be assumed that the impacts on hazards, vulnerability or cost are uniform across a population. The valuation of today versus tomorrow depends to a large extent on variables specific to an individual's circumstances. The welfare impact of a policy needs to take that into account.

Figure 2: Understanding the welfare impacts of climate policy

Prioritizing policies for poverty reduction and climate action

With this framework in mind, four key points emerge for policy prioritization:

1. Strongly prioritize triple wins for the poor: policies with positive returns today that reduce vulnerability and positively impact future hazards. Such “triple win” policies do exist. For example, investments to improve soil quality bring agricultural productivity gains and also reduce the impact of from lack of rain as restored soils are better able to retain moisture. These policies should be strongly prioritized, particularly when they benefit the poorest. Further investment in identifying policies that do this across contexts is needed. However, in many cases there are tradeoffs which we address in the following points.
2. Prioritize development policies that reduce vulnerability: Many policies that increase the ability of households to earn income also reduce the impact of extreme events on welfare. For example, mobile money spurs development but also allows households to receive transfers or remittances when a crisis strikes. Similarly, improved road access in remote areas brings development but also reduces the impact of local droughts on local food prices. Without actions to reduce the carbon content of goods and energy in a country, these policies can increase emissions, as many growth-enhancing policies would. Commensurate climate actions will be needed.
3. Balance cross-generational trade-offs for poor people: While some policies that are focused on altering the probability distribution of hazards can have quite immediate benefits, many will have a cost today and benefits further in the future, representing a tradeoff. This has two implications: (i) reductions in hazards should be achieved with policies that have the least cost on poor people; (ii) where costs on poor people are unavoidable, they should be compensated with effective instruments that address the intertemporal trade-off.
4. Cross-border implications: Overconsumption of carbon in high income countries has caused the problem we collectively face today. Policies in high and upper-middle income countries, paid for by people in those countries, have the potential to bring benefits for poor people living in low- and middle-income countries by positively impacting the distribution of hazards they face . Equity in the financing of climate-related interventions is a fundamental condition for their success.

Poverty and climate change are two of the most pressing issues of our time. They require urgent attention and bold policy actions at local, national, and global levels. And as we’ve seen here, they are not isolated issues. Poverty and climate are in fact intricately linked. Policies to address one have clear implications for the other. If we think carefully about these linkages and what they imply for potential policy tradeoffs or complementarities, we can succeed in making sustainable and scalable progress on both agendas .