Climate action and social fairness

Europe often frames climate policy around the idea of a just transition.
Has Europe gone further than the US in linking climate action with social fairness? Could the US realistically adopt elements of the European just transition approach, or are the political conditions too different?

Across the Atlantic, the United States and Europe often pursue different approaches to energy and climate policy. Yet many of today’s policies have been shaped by decades of exchange, adaptation, and mutual learning.

Ahead of the FSR–MIT CEEPR Annual Conference on Energy and Climate Policy, this series brings together experts from both sides of the Atlantic to explore some of the defining questions facing the energy transition.

In this instalment, experts from MIT CEEPR and the Florence School of Regulation examine how Europe and the United States are linking climate action with social fairness, and what each side of the Atlantic can learn from the other’s experience in designing and implementing a just transition.

Christopher R. Knittel, MIT Sloan School of Management and MIT CEEPR

Europe has clearly gone further in institutionalising fairness. The Just Transition Fund and, more importantly, the Social Climate Fund — roughly €86 billion tied directly to ETS2 auction revenue — build redistribution into the design of the carbon price itself. Washington has never built that architecture. We do distribution, but implicitly, through tax credits, formula programs, and place-based bonuses, and we rarely call it what it is.

That said, I would separate the framing from the outcomes. In work with Tomas Green and Shereein Saraf, we used machine learning to estimate household carbon footprints across roughly 80,000 US census tracts, then ran seven climate policies through them. The instrument does far more distributional work than the rhetoric. Carbon-based taxes come out broadly progressive. Intensity standards — the regulatory approach the US has leaned on hardest — come out regressive, and because they raise no revenue, there is no lever available to fix them. Revenue is what buys fairness. The ETS2–Social Climate Fund pairing is precisely that structure.

Income is also the wrong single axis. Both dividends and intensity standards fall disproportionately on rural and middle-income households, who drive more and have fewer substitutes. A uniform per-capita dividend does not fix that; a dividend adjusted for geography and urbanity largely does.

I would add a channel that gets far too little attention on both continents: electricity tariffs are themselves a major distributional instrument, and right now a badly designed one. With Fischer Argosino, I find that once you control properly, the association between renewable portfolio standards and retail electricity prices disappears — renewables are not what is driving American rate increases. The affordability problem is largely rate design. We recover fixed network and policy costs through a volumetric per-kilowatt-hour charge, so households that install rooftop solar — disproportionately higher income — shed those costs onto neighbors who cannot, while the inflated volumetric rate simultaneously penalizes anyone electrifying their heating or driving. A regressive tariff can quietly undo a progressive climate policy. No just-transition fund is large enough to offset a rate structure working against it every month.

The same is true of the transfer programs we already have. With Carlos Batlle, Peter Heller, and Tim Schittekatte, we found that LIHEAP — the federal programme that helps low-income households pay their energy bills — still allocates on formulas written in the 1980s, while energy poverty has migrated to the South and Southwest, and that closing the gap would take roughly four times current funding. America has just-transition machinery. It is misallocated and underfunded, which is more tractable than a missing philosophy.

Where the US conversation is genuinely weaker is that we score only one side of the ledger. With Kimberly Clausing and Catherine Wolfram, we estimated what climate change is already costing American households today: roughly $900 a year, and in about a tenth of US counties more than $1,300. Rising home insurance premiums are the largest single channel, at up to $360 a year, with wildfire smoke mortality adding another $100. Direct temperature effects nearly wash out, since fewer cold deaths offset more heat deaths. The damages concentrate along the Gulf Coast, in Florida, and in parts of the West, and they are regressive: they consume a larger share of a poorer household’s budget. Inaction is itself regressive.

And here is the part Europeans may find surprising: American states are already building Social Climate Fund analogues, they simply call it affordability. California reauthorised its carbon market through 2045 as “cap-and-invest,” returns allowance revenue to households through the automatic California Climate Credit, and this year moved that credit into August, September, and February so it lands in the highest-bill months. Statute directs at least 35 percent of proceeds to disadvantaged and low-income communities. The same pattern is emerging around the Regional Greenhouse Gas Initiative, or RGGI — the cooperative cap-and-trade programme covering power-sector emissions across the Northeast and Mid-Atlantic states, and the closest American cousin to the original EU ETS. New Jersey routed roughly $123 million of RGGI allowance proceeds into a universal $100 residential bill credit, Rhode Island has filed to place RGGI revenue on winter bills, and Virginia — which rejoined the programme on 1 July — has its utility commission actively weighing whether to convert those proceeds into customer rebates, with recommendations due in November.

So: the vocabulary will not cross the Atlantic. The mechanics already are, one state at a time, labeled as bill relief rather than justice. And the lesson runs both ways. ETS2 has now been postponed to 2028 over affordability fears. Fairness institutions have to be credible and visible before the price arrives — which is exactly why California moved its credit to the hottest months of the year.

Simone Borghesi, EUI-FSR Climate director; Jacopo Cammeo, EUI-FSR

Europe has undoubtedly gone further than the US in embedding social fairness into the institutional architecture of climate policy. But building that architecture is only half the challenge: the real test is whether redistribution is well targeted, visible to citizens, and politically durable as carbon pricing expands.

The European Green Deal already recognised that the costs of decarbonisation are unevenly distributed across workers, households and territories. The Just Transition Mechanism (JTM), designed to mobilise around €55 billion over 2021–2027, therefore targets regions most exposed to the decline of coal and carbon-intensive activities rather than distributing support uniformly across the population. This territorial dimension is important. As Christopher Knittel also stresses from the US perspective, income alone may not be sufficient to identify those most exposed to the costs of climate policy: where people live, work and consume energy matters too.

Europe also has a powerful instrument for financing its climate policies and making them fairer: revenues from carbon pricing itself. The EU ETS has generated more than €258 billion in auction revenues since 2013, including over €43 billion in 2025 alone. The Social Climate Fund takes this logic a step further by explicitly linking the expansion of carbon pricing to support for vulnerable households, micro-enterprises and transport users. Together with national co-financing, the Fund is expected to mobilise at least €86.7 billion over 2026–2032.

This makes revenue recycling not only a distributional tool, but also a potentially important source of political support for carbon pricing. As shown in Borghesi and Ferrari (2023), citizens’ acceptance of carbon pricing depends not only on the level of the carbon price, but also on how the revenues are used. In this respect, the European experience supports one of the central points emerging from Christopher Knittel’s contribution: raising revenue gives policymakers an additional lever for addressing the distributional consequences of climate policy.

But earmarking revenues is not the same as using them effectively. Member States retain considerable discretion over how ETS revenues are spent. Part of the revenues can, for example, support compensation for indirect carbon costs in electricity-intensive industries, while expenditure can also be carried over across years. This creates a potential gap between the European architecture and its implementation. The forthcoming ETS review therefore raises an important question: not simply how much revenue carbon pricing generates, but how transparently and effectively that revenue is used to support the transition.

There is also another side of climate fairness that is easily overlooked: the distributional cost of inaction. Climate damages themselves are highly unequal, both across households and across territories. Under current warming trends, lower-income Europeans are expected to bear disproportionately large economic losses. This is particularly relevant in Southern Europe, where exposure to physical climate risks is especially high. In our work with Carlo Carraro, Matteo Calcaterra and Massimo Tavoni on Italy, for instance, we find that unmitigated physical climate risks could reduce Italian GDP by 1.6–6% by mid-century, while significantly worsening public-debt dynamics and generating €11.5–18 billion a year in infrastructure damage alone by 2050. In this sense, spending less on the transition does not necessarily protect vulnerable groups: it may simply shift larger and more uneven costs into the future.

Yet Europe is now entering a more difficult phase. The institutions designed to make the transition fairer were largely created when political support for ambitious climate action was stronger. Today, concerns over affordability, competitiveness and the distribution of transition costs have become much more prominent. The postponement of ETS2 to 2028 illustrates this tension. The question is therefore no longer only whether Europe can design institutions for a just transition, but whether it can preserve political support for them when the costs of the transition become more visible.

The transatlantic comparison therefore points to convergence rather than to a simple European lead. Europe has gone further in building an explicit institutional architecture around the idea of a just transition; parts of the US, meanwhile, are experimenting with similar mechanisms through carbon-revenue recycling and targeted affordability measures. What Europe can perhaps offer is the experience of integrating these instruments within a common climate-policy framework. What the US experience reminds Europe is that fairness ultimately depends on how support reaches households and communities, not simply on how institutions are labelled.

The real test for Europe is therefore no longer whether it can design a just-transition architecture — it already has. It is whether it can make that architecture sufficiently targeted, visible and credible to sustain public support as carbon pricing expands. Ultimately, a just transition is not only about compensating those who bear the costs of climate policy. It is about distributing those costs fairly — and recognising that climate inaction has distributional consequences of its own.

Looking ahead to Florence

But the discussion doesn’t end here. These are some of the questions that participants will continue exploring during the FSR–MIT CEEPR Annual Conference on Energy and Climate Policy in Florence this October, where researchers, policymakers, and industry representatives will discuss how cooperation across the Atlantic can continue to shape the future of energy and climate policy.