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1、CLIMATE AND EQUITY:A Framework to Understand Welfare Impacts and Guide Policy Action Ruth Hill,Trang Nguyen,Miki Khanh DoanProsperity Insight SeriesPOVERTY|POVERTY|POVERTY POVERTY|POVERTY|POVERTY|POVERTY|POVERTY|POVERTYPOVERTY|POVERTY|POVERTY POVERTY|POVERTY|POVERTY|POVERTY|POVERTY|POVERTYPOVERTY|PO

2、VERTY|POVERTY POVERTY|POVERTY|POVERTY|POVERTY|POVERTY|POVERTYPOVERTY|POVERTY|POVERTY POVERTY|POVERTY|POVERTY|POVERTY|POVERTY|POVERTYPOVERTYPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedPublic Disclosure AuthorizedRuth Hill,Trang Nguyen,Miki Khanh Doan1POVERTY|PO

3、VERTY|POVERTY|POVERTY|POVERTY|POVERTY|POVERTY|POVERTYCLIMATE AND EQUITY:A Framework to Understand Welfare Impacts and Guide Policy Action 1.The American Economic Association author randomization tool was used to randomize author names.This paper builds on an earlier policy brief to which Ben Brunckh

4、orst and Ghazala Mansuri also contributed.It has benefited from comments by Richard Damania,Alan Fuchs,and Maria Ana Lugo,as well as suggestions by Haroon Bhorat,Francois Bourguignon,Shanta Devarajan,Francisco Ferreira,Susanna Gable,Stephane Hallegatte,Reema Hanna,Ravi Kanbur,Nora Lustig,Danielle Re

5、snick,and Florencia Torche.This paper has also benefited from many staff in the World Banks Poverty and Equity Global Practice who provided inputs and comments through a series of presentations(in particular,Javier Baez,Ana Maria Munoz Boudet,Sandra Baquie,Carlos Rodriguez Castelan,Lourdes Rodriguez

6、 Chamussy,Alejandro de la Fuente,Daniel Valderama Gonzalez,Johannes Hoogeveen,Gabriela Inchauste,Rinku Murgai,Pierella Paci,Lokendra Phadera,Ambar Narayan,Reena Badiani,Monica Robayo,Jorge Luis Castaneda Nunez,Samuel Rodriguez,Sailesh Tiwari,Ailin Tomio,Matthew Wai-Poi,and Salman Zaidi).It was prepa

7、red under the guidance of Luis Felipe Lopez-Calva and Benu Bidani.2024 International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington DC 20433 Telephone:202-473-1000 Internet:www.worldbank.org This work is a product of the staff of The World Bank with external contr

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12、s given.Any queries on rights and licenses,including subsidiary rights,should be addressed to World Bank Publications,The World Bank Group,1818 H Street NW,Washington,DC 20433,USA;fax:202-522-2625;e-mail:pubrightsworldbank.org.Cover photo:brazzo/iStock.Further permission required for reuse.Document

13、photos:Ivan Bruno/iStock.Further permission required for reuse,Lingbeek/iStock.Further permission required for reuse,georgeclerk/iStock.Further permission required for reuseCover design:Anatol Ursu,https:/ AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note A

14、bstractReducing the impact of climate change on poor and vulnerable households is essential for hastening poverty reduction.In thinking about policies that do this,it is useful to apply the same hazard,exposure,and vulnerability framework that is often used to understand the physical impacts of clim

15、ate change and add the non-climate benefits and costs to households that these policies can also bring.Policies that reduce hazards and/or vulnerability while bringing non-climate benefits should be prioritized where possible.However,some development policies that bring non-climate benefits,particul

16、arly in higher-income and higher-growth countries,may increase emissions by enough to worsen future hazards,so their emissions impact needs to be managed with compensating actions.Policies that reduce the hazards faced by poor households are needed,and the non-climate cost of these policies on poor

17、people should be minimized or compensated where it cannot be avoided.TABLE OF CONTENTSExecutive Summary 11.Background 32.The Welfare Impacts of Climate 52.1.The Asset-Based Framework 52.2.The Role of Climate in Determining Household Welfare 72.3.The Impact of Climate Change on Welfare 122.4.Measurin

18、g the Welfare Impacts of Climate Change 133.The Welfare Impacts of Climate Policies 233.1.The Impact of Climate Policies on Welfare 233.2.Policies with Minimal Trade-off 283.3.Addressing Trade-offs:Reducing Vulnerability at a Cost to Income Growth 323.4.Addressing Trade-offs:Reducing Hazards While M

19、inimizing Welfare Costs 343.5.Cross-Border Issues and Climate Justice 43References 45viCLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note 1CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note EXECUTIVE

20、SUMMARYReducing the impact of climate change on poor and vulnerable households is essential for hastening poverty reduction.Climate change disproportionately affects poor and vulnerable people whose livelihoods often depend on natural resources and whose lack of access to savings,credit,and insuranc

21、e makes hazards more costly.To guide policy action,this document sets out a framework for thinking about the relationship between climate and poverty,and how climate change and climate policies affect household welfare.It also provides a review of the analytical methods and tools that can be used to

22、 quantify the risks climate and climate change pose to welfare,and the impacts of climate action on welfare.The framework uses an asset-based approach to examine how climate outcomes affect household income and consumption,and how households use assets and markets to cope with climate shocks.Poor ho

23、useholds often rely on natural resources for their livelihoods,which makes their incomes more dependent on weather and thus highly susceptible to changes in the climate.Additionally,the lack of capital that accompanies a life in poverty makes hazards more costly.They are less likely to be able to re

24、ly on savings,access to credit,or insurance to manage their losses of income or assets.This paper also adapts the hazard,exposure,and vulnerability framework to explore how climate change and policies impact welfare through three channels:the hazard distribution,changes in exposure and vulnerability

25、,and other benefits or costs to households that do not rely on climate outcomes.The net welfare impact of policy will vary across people.ES.2CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Policies that address climate hazards or reduce exposure a

26、nd vulnerability and bring non-climate benefits for poor and vulnerable people-so-called double or triple wins-should be prioritized.Some examples of triple wins include certain climate-smart agricultural practices,sustainable forest management,investments in clean energy access,and reducing ineffic

27、iencies in trade.These actions have minimal trade-offs in achieving progress on both climate goals and development outcomes.In many cases,trade-offs are present in the short run.For example,rising energy prices and job losses in carbon-intensive sectors can significantly affect poorer and more vulne

28、rable communities.Transitioning to renewable energy sources,for instance,can impose costs on communities that rely on fossil fuel industries.Addressing the trade-offs inherent in climate policies requires a nuanced understanding of the diverse impacts that these policies can have across different po

29、pulations and time horizons.While the long-run benefits are clear,it is important to measure and manage trade-offs that exist in the short to medium term and design compensatory actions to ensure an equitable transition.Policy packages will often be required to ensure that both climate and poverty t

30、argets are simultaneously met.3CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note BACKGROUNDThe World Bank has adopted a new vision statement:to end poverty on a livable planet.The mission underscores the relationship between poverty and climate obje

31、ctives.The livelihoods of poor households are often particularly reliant on their environment and the natural capital to which they have access.Both aspects of the mission are currently under threat.Three decades of progress on poverty reduction that saw 1 billion people move out of poverty came to

32、a halt in 2020.Climate change poses a significant threat to the lives and livelihoods of poor and vulnerable people.Urgent action is necessary to end extreme poverty and prevent catastrophic climate-related hazards and biodiversity loss.1.4CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS

33、 AND GUIDE POLICY ACTION Prosperity Note However,actions that are particularly good for one objective may not be as effective,and could even be detrimental,for the other.Understanding and managing these trade-offs is essential for success.This paper presents a framework for thinking about the relati

34、onship between climate and poverty,and the channels through which climate action impacts household welfare.This framework is then used to highlight the synergies and trade-offs in meeting climate and poverty and equity objectives,along with analytical methods and tools that can be used to quantify t

35、he trade-offs where possible.The goal is to provide a primer to microeconomists working on welfare analysis of climate change and climate action that explains key concepts,provides a rubric for thinking through the issues,and describes available tools to use.At various points,a review of the literat

36、ure is also provided(or review pieces referenced),but the goal of the paper is not to provide a comprehensive review of the literature.Although written primarily for an internal World Bank audience,the paper may have interest beyond that.An earlier policy brief discusses the same framework and polic

37、y guiding principles(Brunckhorst et al.,2023).The focus of the framework is on the economic impacts of climate change and climate action.However,it is important to note that much of the welfare impact of climate change and related extreme events comes through loss of life and adverse effects on phys

38、ical and mental health,particularly in poor places with fewer means to cope.Natural disasters intensified by climate change can cause significant loss of life.The Intergovernmental Panel on Climate Change(IPCC)Sixth Assessment Report projects 250,000 deaths in excess per year by 2050 attributable to

39、 climate change due to heat,undernutrition,malaria,and diarrheal disease(IPCC,2023a).Africa accounts for more than half of this projected excess mortality.5CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note THE WELFARE IMPACTS OF CLIMATE We start the

40、 framework by focusing on a household and its ability to earn income and increase its welfare.The ability of a household to earn income depends on its ability to accumulate and use assets,and the return the household earns when these assets are used to generate income(Lpez-Calva&Rodrguez-Casteln,201

41、6).Household income is determined by these factors,as well as by any taxes paid and transfers and subsidies received.2.2.1.The Asset-Based Framework6CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note A household can accumulate and use many kinds of a

42、ssets.They can be grouped into five main categories:financial(cash in hand,bank accounts,net loans outstanding),physical(agricultural tools,livestock),human(knowledge,skills,health),social(networks,norms,social trust),and natural(land,biodiversity).Income growth comes from investing in and protectin

43、g these assets,and from increasing the returns to these assets.The returns to assets can be increased through technological change and through investments and policies that impact the contextthe market structure and macro conditionsin which a household lives and works.Figure 1 illustrates the core c

44、oncept of this asset-based framework.There are two important points to note from the asset-based framework for a discussion on the relationship between climate and poverty.First,poor households often engage in livelihood activities that heavily rely on the use of natural capital,such as farming,past

45、oralism,and fishing.Consequently,climate change,such as an increase in hot days,extreme rainfall,and storms,imposes significant costs on the income-earning capacity of poor people(Birkmann et al.,2022).Second,the impacts of climate change on welfarewhether that is increased risk of extreme events or

46、 gradual increase in temperatures,sea level rise or changes in wetnessdepend on a households assets and the context in which the household finds itself.For example,households residing near healthy mangrove ecosystems(that is,households with more natural capital)have lower coastal flood risks(Gijsman

47、 et al.,2021).Households with higher levels of education(that is,households with more human capital)are better equipped to adapt their livelihood activities,households with savings(that is,more financial capital)are more capable of restarting businesses,and households with access to remittances(that

48、 is,more social capital)can finance immediate consumption after a weather shock(Mohapatra et al.,2012;Jack&Suri,2014;Rahman&Akter,2014;Anik et al.,2018).Figure 1:Asset-based FrameworkFINANCIALCAPITALSOCIALCAPITALHUMANCAPITALNATURALCAPITALPHYSICALCAPITALASSET ACCUMULATIONXINTENSITY OF USEX RETURNS=IN

49、COME GENERATION CAPACITY+taxes,transfers and subsidiesContext:Market structure¯o conditionsSource:Lpez-Calva and Rodrguez-Casteln,2016.7CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Given the focus of this framework on the impact of climate

50、on welfare,we focus on the welfare that is determined by climate outcomes.The welfare of household i living in location k at time t,can be decomposed into two components:the part determined by climate outcomes,and the part independent of climate,As the discussion in this subsection has underscored,b

51、oth components depend on the environmental and socioeconomic context,ESEC,and the households accumulation and use of assets,X.For then,which is our interest,we can write:where f(.)captures how exposure to a given weather outcome,translates into households welfare given and The general functional for

52、m allows for flexibility in capturing interactions across and within each component.2.2.The Role of Climate in Determining Household WelfareHazard,Exposure,and Vulnerability FrameworkIn this section,we focus on further unpacking To do this,we use the hazard,exposure,and vulnerability framework that

53、is commonly used in modeling the impact of climate events.Figure 2 provides an overview of this framework,incorporating the definitions of these components outlined by the IPCC.Hazard refers to a potential adverse weather event that may affect peoples welfare.Exposure captures the number of people o

54、r assets exposed to a given hazard.Vulnerability is the extent to which a hazard adversely impacts a households welfare.Figure 2:Hazard,Exposure,and Vulnerability FrameworkThe propensity or predisposition to be adversely affected.Vulnerability encompasses a variety of concepts and elements,including

55、 sensitivity or susceptibility to harm and lack of capacity to cope and adapt.The presence of people;livelihoods;species or ecosystems;environmental functions,services,and resources;infrastructure;or economic,social,or cultural assets in places and settings that could be adversely affected.The poten

56、tial occurence of a natural or human-induced physical event or trend that may cause loss of life,injury or other health impacts.as well as damage and loss to property,infrastructure,livelihoods,service provision,ecosystems and environmenal resources.Source:IPCC,2023b.(Eq.1)8CLIMATE AND EQUITY:A FRAM

57、EWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note In the notation of equation(1),reflects the weather outcome experienced by the household at time t and thus reflects exposure to a given hazard.Vulnerability is the marginal change in welfare experienced by a household in re

58、sponse to a change in the magnitude of the weather outcome:Two aspects of the definition are worth noting.First,there is a difference between how vulnerability is defined in the IPCC definition and how it has been used in the poverty measurement literature(see Hoddinott and Quisumbing 2010 for a rev

59、iew).In the poverty measurement literature,vulnerability is usually defined as the likelihood that a households welfare,falls below a minimum level of consumption given by the poverty line.It is related to the measure given in equation(2)in that if the vulnerability of_ikt to is high,then it is more

60、 likely that W_ikt will fall below a poverty line in expectation,but it is a different concept.Given there is an increasing consensus on the use of vulnerability as part of the hazard,exposure,and vulnerability framework,we use vulnerability as defined in equation(2)in the rest of this note.Second,t

61、he vulnerability of a household to a climate event does not refer only to the initial impact of the event on assets or income;it also reflects the ability of a household to protect its welfare from that impact.This is reflected in the IPCC definition,where vulnerability includes both“the sensitivity

62、 or susceptibility to harm”and“the lack of capacity to cope and adapt.”For example,a household may experience a loss in agricultural income from a weather event.The size of that agricultural income loss will depend on the ability of the household to protect yields from a drought by using irrigation,

63、say,or its ability to move cattle to protect them from loss in a flood.If agricultural income is lost,the size of the total income loss will depend on whether the household is able to compensate for losses in agricultural income by earning income from other activities.If total income is lost,the deg

64、ree to which this impacts consumption will depend on its ability to smooth consumption through borrowing and saving or receiving remittances from friends and family.If welfare is being defined by consumption,all these aspects of a households characteristics will determine its vulnerability to weathe

65、r shocks.In terms of the notation of equation(2)the cross-derivative identifies how much vulnerability depends on household circumstances.The setup discussed so far has good grounding in the applied microeconomic literature and is the same setup used by Hsiang et al.(2019)as they consider the distri

66、bution of environmental damages.However,to properly align equation(1)with the framework set out in figure 2,we need to switch from looking at the welfare impact of a particular weather event that a household has been exposed to,c_kt to looking at“the potential occurrence”of a weather event,h(c_kt),a

67、s indicated by the definition of hazard in figure 2.In other words,instead of examining the ex-post welfare effects of a weather event,we need to think about the expected impact of weather events,and how this expected impact changes as the probability distribution of weather events changes(climate c

68、hange).For a risk neutral person,this can be written as where EW_ikt is the expectation of W_ikt and h(c_kt)represents the probability distribution of possible realized weather outcomes in location k(that is,the climate).In reality,people are risk averse and derive lower utility from extreme outcome

69、s and expected welfare is given as:(Eq.2)(Eq.3)9CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note where u(.)is the utility derived from the welfare outcome achieved when the weather event is c_k.An example of h(c_kt)would be the distribution of pote

70、ntial number of days with average temperatures above 30 degrees Celsius in a year in a given location,with the hazard referring to the right tail of the distribution where the number of days in this category significantly affect humans living and working conditions.Hazard,exposure,and vulnerability

71、differ across households.The distribution of hazards is partially determined by ESEC_k,which,in turn,is shaped by households accumulation and use of assets.Exposure and vulnerability to a specific hazard also vary across households because these two components are determined by the context and house

72、holds accumulation and use of assets.When climate shocks occur,they tend to have a larger impact on households that have less access to markets,capital,and basic services(Dercon,2004;Lybbert et al.,2004).With this basic setup in place,the following subsections indicate how the framework can be exten

73、ded to reflect other aspects of the relationship between welfare and climate.Indirect Effects of Weather ConditionsEquation(3)indicates that the welfare of a household in location k is dependent on the weather realized in location k.However,it is quite possible that the weather conditions in another

74、 location impact W_ikt through their impacts on markets.Weather conditions can disrupt markets or reduce supply of food or other commodities and impact prices.While Hallegatte et al.(2016)suggest this will be a large part of the welfare impact of climate change,Artuc et al.(2023),which specifically

75、model trade between locations,suggest that this is unlikely to be a large impact.However,for a given climate shock it is quite possible that interruptions in nearby markets and price impacts occur.This can be represented in equation(3)in two ways.First,h(.)can be a matrix of weather outcomes across

76、places that may impact a household in location k.Alternately,the climate shock in location k can refer to weather-induced changes in prices,even if the weather conditions have occurred elsewhere.Costly Income SmoothingThe subtler welfare impact of extreme weather events occurs not when disasters str

77、ike but in the costly behavior driven by the anticipation of shocks that households are ill placed to cope with(uninsured risk).The direct impact of a calamity on well-being is the visible,headline-grabbing way that conflict or poorly managed disasters set back progress.However,the persistent impact

78、 of uninsured risk on household behavior every yearregardless of whether the feared event occursis arguably the larger constraint to accelerating poverty reduction.In Zimbabwe,this was found to be twice as large an impact on income growth(Elbers et al.,2007).When households face risk,their rational

79、response is to act to avoid it.When households cannot manage the risk in their environment,they may eschew investments and livelihood strategies(such as cultivation of high-risk,high-return crops)that offer great reward but leave them too exposed to the elements of nature,the economic ups and downs

80、of a weak economy,or the uncertain behavior of others.10CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note A number of well-identified studies across contexts show that when households have higher access to climate risk management instruments,there i

81、s a 1530 percent increase in investment regardless of whether shocks occur(Mobarak&Rosenzweig 2013 for rainfall index insurance in India;Elabed&Carter 2014 for area yield insurance in Mali;Karlan et al.2014 for rainfall index insurance in Ghana;Cai et al.2015 for swine insurance in China;Cai 2016 fo

82、r area-yield insurance in China;Fuchs&Wolff 2016 for rainfall index insurance in Mexico;Jensen et al.2017 for livestock insurance in Kenya;Hill et al.2019 for rainfall and area yield insurance in Bangladesh;Bulte et al.2020 for multiperil crop insurance in Kenya;Stoeffler et al.2022 for area yield i

83、n Burkina Faso).When farm households have an opportunity to insure their crops,investment in agricultural inputs goes up:in Ghana,spending on inputs rose by 88 percent,from US$375 to US$705(Karlan et al.,2014);in Mali,spending on inputs increased by 14 percent(Elabed&Carter,2014).The returns to thes

84、e inputs vary in any given year based on weather conditions and prices(Rosenzweig&Udry,2016),but even assuming a relatively low average return to input use,these increases amount to an average increase in income growth of 19 percent a yearenough to move many of these farmers out of poverty and to of

85、fset the losses associated with one-in-five-year events.Equation(3)considers the welfare of household i at one point in time,but in reality,welfare is maximized across multiple periods(Deaton,1997):where w_ikt is welfare in one period.When households are unable to insure welfare from shocks to incom

86、e,the amount that is invested in productions decisions can be less than that predicted by a profit maximation strategy every period(Sandmo,1971).Long-Run Impacts and the Concept of Resilience Much evidence points to the fact that shocks cast a long shadow on welfare.Income shocks increase the probab

87、ility of being infected by the human immunodeficiency virus(Burke et al.,2015).When a household experiences a shock,investments in education and nutrition are reduced,and this increases a childs likelihood of being in poverty as an adult.The impact of nutritional and educational shocks on incomes ea

88、rned as an adult is substantial,including a 3 percent reduction in annual earnings in Ethiopia,20 percent lower wages in Burundi,and 14 percent lower lifetime earnings in Zimbabwe(Alderman et al.,2006;Bundervoet et al.,2009).Shocks can matter even before one is born:in Bangladesh,in utero exposure t

89、o a tornado increased the probability of low birth weight and decreased birth length(Gunnsteinsson et al.,2022);in Mozambique,those exposed to drought in utero had fewer years of schooling(Baez et al.,2017).Not only do the initial impacts of climate events vary by household characteristics,but so do

90、es the ability to recover from shocks.This is depicted in figure 3,which indicates how poorer households may experience both larger losses in a crisis and slower recovery from a crisis.11CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Figure 3:Res

91、ilience is Often Lower for Lower-Income HouseholdsSHORT-RUN IMPACT IN CRISISCrises have larger welfare effects on poorer households.This means initial welfare differences between rich and poor get larger.LONG-RUN RECOVERYIncome growth is often slower for poor households in recovery as they lost huma

92、n capital and assets during the crisis.This also makes the welfare difference larger.NEXT CRISISWithout intervention,this cycle repeats increasing inequality as it goes.A richer than average householdA poorer than average householdSource:Hill and Narayan,2020.12CLIMATE AND EQUITY:A FRAMEWORK TO UNDE

93、RSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Large and sustained income losses require households to use coping mechanisms with long-run impacts:inadequate nutrition in first 500 days of life,high rates of indebtedness,and,at times,the loss of productive assets and permanent withdr

94、awal of children from schools.Past evidence suggests that reducing food consumption is most frequently used as a coping strategy after a fast onset shock,whereas sale of productive assets seems to be mainly used by households as a coping strategy of last resort.Dercon(2004)finds that 8 percent of ho

95、useholds affected by the famine in Ethiopia in the mid-1980s reduced food consumption,39 percent sold valuables(on average 29 percent of livestock holdings were liquidated),7 percent migrated in distress,and 11 percent had at least one member go to a feeding camp.This ordering of the prevalence of c

96、oping strategies was constant in every village,even though the severity of harvest failure varied across villages.In Burkina Faso in 1984,combined livestock sales offset between 15 percent and 30 percent of the income losses resulting from drought during this period,while more than half of the rainf

97、all-induced crop losses were passed on to reduced consumption(Fafchamps et al.,1998;Kazianga&Udry,2006).In southern Ethiopia,drought did not trigger the sale of livestock,and in northern Kenya,households chose to protect the assets they had by reducing food intake and energy levels(Lybbert et al.,20

98、04;McPeak&Barrett,2001).A household that is less vulnerable or more resilient will recover more quickly;a household that is more vulnerable(or less resilient)will recover more slowly.In equation(3),this can be represented by considering welfare at time t to be dependent also on weather conditions in

99、 a prior period t-n.The size of n to consider will depend on the context.The concept of resilience refers to this ability of households to recover in a timely manner.Although resilience used to be used to capture the notion of“bouncing back,”it has over time become broader,taking into account the pr

100、ocess by which households recover,the degree to which shocks can be anticipated and managed(Lavell et al.,2012).2.3.The Impact of Climate Change on WelfareClimate change is altering the distribution of hazards faced by individuals in all locations in the world.The probability of extreme events“tail”

101、events that reflect events in the tails of the hazard distributionis expected to increase.This includes an increasing likelihood of catastrophic floods,drought,heat waves,and cyclones.Additionally,the average weather is expected to change with temperatures increasing everywhere and wetness increasin

102、g in some places.All of these changes can be reflected in a change in the distribution h(.).The change in welfare that a change in the climate brings is thus given byassuming everything else stays equal.Where h(.)is the probability distribution of weather outcomes under climate change.(Eq.4)13CLIMAT

103、E AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note There are six aspects to the changing climate that will impact welfare:i.The frequency and intensity of extreme weather events that cause asset and income losses will increase(see,for example,Hallegatte et

104、 al.,2016;Birkmann et al.,2022).ii.Agricultural incomes will,in most cases,fall(see,for example,Ortiz-Bobea et al.,2021).In most countries close to the equator,climate change will bring yield reductions with income losses for agricultural households(Bezner Kerr et al.,2022)and ambiguous impacts on f

105、ood prices(see,for example,Costinot et al.,2016).In some countries(for example,in Eastern Africa and Mongolia),this will bring yield increases and income gains.iii.Although less well understood,droughts will also have impacts in urban areas through their impacts on health and productivity.In Latin A

106、merica,droughts are estimated to have four times the impact on income losses than floods in urban areas(Damania et al.,2017).iv.Higher temperatures will reduce labor productivity and in the extreme increase mortality(as the risk of heat-associated deaths increases)and morbidity,as a changing climate

107、 will increase the prevalence of some pathogens(see,for example,Hsiang et al.,2019;Carleton et al.,2022).v.Sea level rise will make some places uninhabitable(see,for example,Oppenheimer et al.,2019).Land currently occupied by approximately a third of Bangladeshs and Vietnams populations is projected

108、 to permanently fall below the high tide lines by 2100(Kulp&Strauss,2019).vi.Higher temperatures and rainfall shocks have been linked to more civil conflicts(see Burke,Hsiang,and Miguel 2015 and Koubi 2019 for a comprehensive review),crimes(Blakeslee&Fishman,2018),and gender-based violence(Miguel,20

109、05;Sekhri&Storeygard,2014).2.4.Measuring the Welfare Impacts of Climate Change Damage or Vulnerability FunctionsA key component of any measure of the welfare impacts of climate change is the vulnerability or damage function(these terms can be used interchangeably)that relates losses in welfare to cl

110、imate conditions.This has been estimated several ways in the climate economics literature(see Auffhammer 2018 for a good review).Analyses focusing on weather shocks can be used to examine the impact of extreme weather events on welfare,corresponding to estimate the vulnerability function described i

111、n equation(2).The method most commonly used in welfare analysis relies on estimates derived from observed data and identifies the causal impact of weather changes on outcomes of interest by examining the effects of specific weather events in a particular location at a specific point in time.The unde

112、rlying assumption is that while the probability distribution of an event may not be considered exogenous,its timingconditional on the distributionis assumed to be exogenous to the households.Auffhammer(2018)and Dell et al.(2014)provide an overview of the method.In summary,data on hazards are matched

113、 to household observations in survey data using the best available data on the geographic location of a household(either admin codes or GPS)and a fixed effects regression is run to identify the 14CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note imp

114、act of weather in determining welfare.Baquie&Foucault(2023),Gascoigne et al.(2024),and Strobl&Spencer(2024)provide a recent overview of methodological considerations.While these analyses are well identified and provide information on the impacts of extreme weather events that are becoming more frequ

115、ent with climate change,the response to random short-term fluctuations in weather might be very different from adaptation responses to permanent shifts and changes in average conditions.For instance,groundwater irrigation may provide a short-term adaptation strategy,but that may not be available in

116、the long term if the resource is depleted.In addition,given few extreme events are observed,the ability to estimate the impact of truly extreme events is also limited.It is not necessarily the case that the impact of these events can be extrapolated using coefficients estimated on more moderate even

117、ts.An alternative approach is using observed trend changes to examine the impact of climate change.In these analyses,the c_t in equation(2)does not reflect a specific event but rather the change in the climate over time.The coefficient being estimated is much closer to the coefficient required to es

118、timate the impact of climate change on welfare,but the challenge of these analyses is that it is much less plausible that the coefficient being estimated reflects the causal impact of the changing climate on the outcome of interest.Table 1 summarizes and highlights the advantages and caveats of each

119、 approach.The first approach,estimating the impact of hazards on welfare outcomes(income,consumption,poverty,or nutrition outcomes)for exposed people,has been a core aspect of applied microeconomic analysis,including much work by the World Bank.Dell et al.(2014)provide a review of earlier work on th

120、is and Kala et al.(2023)review some of the recent work.Recent examples of World Bank work in this area include Hill&Porter(2017),Pape&Wollburg(2019),Baez et al.(2019),Baquie&Fuje(2020),and Kochhar&Knippenberg(2023).Other work looks at how extreme weather events have impacted local economic activity.

121、For example,Zaveri et al.(2023)use subnational GDP data and find that weather shocks reduce GDP growth by 0.40.8 percentage points.Although damage/vulnerability functions have been estimated in many contexts for many years,they have not typically been used to model those at risk to climate shocks or

122、 the likely poverty impacts of future shocks or climate trends.The next section summarizes work on welfare risk from extreme weather events that are likely to become more frequent with climate change.15CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity No

123、te Table 1:Estimating Damage Functions ApproachSummary of methodData requirementsAdvantagesCaveatsExamplesPanel or repeated cross-sections of welfare data and weather shocks to estimate the welfare impact of extreme events1.Regress welfare on measures of the weather(linearly or nonlinearly),controll

124、ing for unit-specific and time-period fixed effects 2.To estimate differential damage impacts for different types of individuals,interact the shock with household characteristics1.Gridded historical climate data 2.Repeated measurements of welfare with location coordinates(can be on different individ

125、uals(cross-sectional)or the same individual(panel data)1.Impact is causally identified(for survivors,see caveats)2.Can be used to understand changes in welfare over time,predict impacts of climate shocks,generate probability distributions of welfare,and simulate how welfare changes with a changing c

126、limate1.The impact estimated is:The direct loss and not impacts beyond the local area,such as those that might arise from wider disruption of markets,macro effects Often a moderate shock:extreme events are unlikely to be observed in the household data,limiting ability to estimate losses for extreme

127、events The impact after currently available ex post and ex ante measures are used,masking some of the true cost of shocks and uninsured risk 2.The estimates are also subject to survivor bias(consumption only measured for those still in place after the shock)Baez&Santos(2007);Deschnes&Greenstone(2007

128、,2011);Pape&Wollburg(2019);Baquie&Fuje(2020);Kochhar&Knippenberg(2023);Hill&Porter(2017);Gascoigne et al.(2024)Ricardian cross-sectional approach to estimate the impact of a changing climateRegress welfare on long-term weather variables(allowing for nonlinear effects),along with control variables1.G

129、ridded historical weather data over a substantial period of time2.Cross-sectional measure of welfare with location coordinates 1.Allow for private adaptation to climate conditions,based on the intuition that in a stationary climate,individuals optimize according to the environment they face and then

130、 compare outcomes in hot versus cold areas2.Rely on data readily available1.Omitted variable bias since average climate could be correlated with other unobserved time-invariant factors2.Assuming costless adaptation3.Traditional Ricardian approach only considers historical climate matters,assuming in

131、dividuals base their actions on historical climate.Forward-looking Ricardian approach(Severen et al.,2018)corrects the direction and magnitude of the bias caused by failure to incorporate climate expectations into current behaviors Mendelsohn et al.(1994);Seo&Mendelsohn(2008);Dell et al.(2009);Sever

132、en et al.(2018)16CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Quantifying the Welfare Risk of Extreme Weather Events Once a vulnerability function is estimated,it can be combined with hazard and exposure data to estimate the expected welfare lo

133、ss of different climate events(equation 3).These can be aggregated up to provide maps or national estimates of climate risk to welfare outcomes.Examples of this work are Porter&White(2016),Hill&Porter(2017),and Kochhar&Knippenberg(2023).In looking at Malawi,Gascoigne et al.(2024)use historical data

134、on a soil moisture index(figure 4)and simulated weather data(based on historical weather patterns).The graph shows the increase in the poverty rate that results from different weather events.Figure 5 comes from Bodewig et al.(2021),who use the Stress Testing Social Protection tool to determine the n

135、umber of households that social protection support needs to reach in the event of a drought shock in Ethiopia.Long difference estimation to estimate the impact of a changing climate Construct long-term welfare and weather variables at two different points in time for a given location,then calculate

136、changes in outcome as a function of long-term changes in average climate conditions1.Gridded historical weather data2.Panel measure of welfare with location coordinates 1.Accounting for time-invariant and time-trending unobservables,thus provide plausibly causal estimates of damages that account for

137、 observable adaptation by using differential climate trends(e.g.,decadal changes)2.Can be used to test whether the shorter run damages of climatic variation on outcomes are in fact mitigated in the longer run1.Omitted variable bias may remaine.g.,trends in local emissions could affect both climate a

138、nd welfare outcomes2.Differential trends could be driven by short-run variation in weather around the chosen endpoint periods 3.Baseline used for comparison incorporates some degree of adaptation4.Significant data requirements(broad spatial coverage of data over long periods of time)Dell et al.(2012

139、);Burke&Emerick(2016)Source:This table is drawn from three review articles:Dell et al.(2014),Auffhammer(2018),and Baquie&Foucault(2024).17CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Both examples use the historical distribution of shocks rathe

140、r than the future distribution of shocks.Baquie&Foucault(2023)describe how this approach can be used to provide estimates of risk that take into account projected weather changes.The analysis involves two steps:(1)estimating the historical impact of weather on welfare using methods already highlight

141、ed,and(2)predicting the impact of future weather by simulating consumption distribution resulting from the forecasted distribution of weather.It is important to note that this approach(and the mapping and proxy approach described below)focuses on the direct impacts of climate shocks,in that those ex

142、posed are those living in locations where the shock occurred.Having a clearer understanding of the degree to which indirect effects(such as impacts on food prices)are an important part of the welfare impact of these shocks is important for understanding the degree to which this partial equilibrium a

143、nalysis captures the overall welfare cost of extreme events.The answer to this question may well differ by context,depending on the level of market integration.Another concern with this approach,as discussed briefly above,is that it may fail to capture the impacts of future extreme events,particular

144、ly if the predicted intensity of these events falls outside the historical distribution.This limitation is significant in the context of climate change,where extreme events are likely to exceed historical norms in both frequency and severity.Baquie&Foucault(2023)recommend that researchers carefully

145、review the variables and model specifications to effectively account for non-linearities in climate phenomena.It is also worth noting that these models capture vulnerability of households with the characteristics and behaviors they have today.Future adaptation measures may alter how households respo

146、nd to shocks of similar magnitude to those historically observed.For example,Barreca et al.(2016)find that the adoption of residential air-conditioning in the United States led to the decline in the mortality impact of hot days by 75 percent.This approach is data intensive but provides information o

147、n the size of need resulting from climate risk.However,this is not needed for many policy questions,such as which parts of the country Figure 4:Impact of Drought on Poverty Rate in MalawiSource:Gascoigne et al.,2024.Figure 5:Change in Number of Rural Pool as a Result of Rainfall in EthiopiaSource:Bo

148、dewig et al.,2021.18CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note are more at risk from extreme weather events.Additionally,in the absence of data to estimate vulnerability,reasonable proxies have been used to estimate who is likely to be vulner

149、able,and those approaches can also be used to provide an indication of the number of people at risk even when intensive modeling work is not possible.We turn to these approaches now.Counting and Mapping Those at RiskMuch work has been undertaken by the World Bank,particularly in Poverty and Equity A

150、ssessments and Country Climate and Development Reports(CCDRs),to identify which places have more people at risk of being negatively impacted by an extreme weather event.This work uses variables that are expected to be correlated with the vulnerability function(for example,current welfare level or as

151、set holdings of a household)and overlays these measures with measures of hazard and exposure to provide an indication of which parts of a country are more or less at risk.One size does not fit all,and the indicators that are selected will likely need to be tailored to the country level to reflect th

152、e nature of the climate risks that the country is most exposed to.However,some useful points can be noted from the work done to date:Hazard:Choosing the right hazard data requires choosing the nature of the risk(for example,flood,drought),the severity of event that would be considered(for example,wa

153、ter depth in the case of flood,or water deficit in the case of drought),and the probability that a given location will experience such an event(for risk modeling,this is usually expressed in return period,the expected number of years in which the event will occur once).Much can be learned from exist

154、ing work on mapping hazards(see,for example,the Global Facility for Disaster Reduction and Recoverys overview of commonly used hazard data sets).There are some hazards for which choosing the data is more challenging,such as drought,but recent work suggests that the Normalized Difference Vegetation I

155、ndex(NDVI)or a soil moisture index works well across settings.Exposure:Gridded population data are used for exposure when it comes to outcomes,such as welfare,which affect people.If there are shocks that some people are not exposed tofor example,drought conditions for those living in a citythen the

156、population that is exposed(in this example,the rural population)can be used for the exposure layer.Most mapping work in the practice uses the Global Human Settlement Layer from the European Commission Joint Research Centre).Vulnerability:The Geospatial Poverty Portal provides poverty data at the adm

157、in 1 or 2 level for most countries in the world and is a useful starting point for looking at an income dimension of vulnerability(box 1).In countries where poverty maps are available,poverty at a finer level of disaggregation can be used.In the absence of poverty map data,some teams have used the r

158、elative wealth index(Chi et al.,2022).Data on additional aspects of vulnerability,such as access to markets,finance,and social protection,which are captured in household surveys have also been used(Doan et al.,2023).19CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTI

159、ON Prosperity Note A number of reports undertaken by the World Bank have overlaid exposure and poverty.For instance,figure 6,taken from the 2022 Vietnam Poverty and Equity Assessment,illustrates the overlap between poverty and environmental risk maps in Vietnam(World Bank,2022c).Additional examples

160、can be found in the Poverty and Equity Assessments of Brazil and Honduras(World Bank,2022a;Robayo-Abril et al.,2023)and the CCDRs for Cambodia and Pakistan(World Bank,2023a;World Bank,2022f).Other work explores overlaying other dimensions of vulnerability(see,for example,the Project Targeting Index

161、work).Doan et al.(2023)provide a global estimate of the number of people at risk of extreme weather events(flood,drought,cyclone,or heat wave);these are the people who are both exposed and highly vulnerable.Vulnerability is assessed by a set of indicators capturing the physical propensity In the haz

162、ard,exposure,and vulnerability framework,vulnerability is a characteristic of a person or household.In the welfare literature,vulnerability refers to the likelihood of being poora function of both the characteristics of the household and the uncertainty the households face as a result of climate and

163、 other shocks.While the“vulnerability to poverty”concept is not being used in this paper,we review in this box how the literature has measured the concept,as it is still used in welfare analysis.Many of the early estimates on measuring vulnerability to poverty used panel data that had repeated obser

164、vations of welfare outcomes on the same individual.Given this type of data is often not available,there is a long tradition in the World Bank of providing an estimate of the vulnerability to poverty by using insights from available panel data work.This requires using panel data to estimate the level

165、 of consumption or income that an individual would need in order to have a low probability of falling into poverty.Lpez-Calva&Ortiz-Juarez(2014)proposed using a 10 percent probability of becoming poor to identify those vulnerable to poverty.Using this approach,they calculated that the vulnerability

166、threshold for Chile,Mexico,and Peru is about 2.5 times the poverty line.Similar analysis in Indonesia found that the vulnerability threshold is 1.5 times the poverty line(Jellema et al.,2017;World Bank,2019b).This approachof setting a vulnerability to poverty line at some multiple of the poverty lin

167、ehas been used in World Bank regional reports and poverty assessments for Brazil,Cambodia,Mongolia,Tanzania,Trkiye,Uganda,Vietnam,and others.The multiples used range from 1.25 to 2.5 times the poverty line depending on the context.a In the context of the United States,several studies have considered

168、 the threshold between 1.25 and 2 times the Federal Poverty Guidelines to identify those who are poor or near poor,including Montgomery et al.(1996),Heggeness&Hokayem(2013),Hair et al.(2015),Saczewska-Piotrowska(2016),and Dube(2019).BOX 1:The Difference Between Measuring Vulnerability and Vulnerabil

169、ity to Povertya.Recent poverty assessment reports use a range of multiples of the poverty line to define vulnerability to poverty:1.25 for Cambodia(Karamba et al.,2022),1.5 for Indonesia and Myanmar(Pape&Ali,2023;World Bank,2022h),1.7 for Vietnam(World Bank,2022c),1.75 for EAP(Ruggeri Laderchi et al

170、.,2017),2 for Brazil,Europe and Central Asia,Honduras,Peru,and Uganda(World Bank,2022a;Bussolo et al.,2018;Robayo-Abril et al.,2023;Word Bank,2023d;World Bank,2016),and almost 2.5 for Latin American and the Caribbean(World Bank,2021).20CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND

171、 GUIDE POLICY ACTION Prosperity Note to experience severe losses(proxied by the lack of access to basic infrastructure services)and the inability to cope with and recover from losses(proxied by low income,not having education,not having access to financial services,and not having access to social pr

172、otection).Figure 6:Overlapping Maps of Vulnerability(Measured by Poverty)and Exposure to Hazards in VietnamSource:World Bank,2022c.Modeling the Welfare Impacts of Climate ChangeA body of literature on assessing the welfare impacts of climate change uses damage functions to estimate welfare losses re

173、sulting from the changing trend in climate conditions.Much of the published literature uses impacts on GDP per capita as a proxy for welfare impacts rather than modeling the distributional implications of climate change(Costinot et al.,2016;Cruz&Rossi-Hansberg,2021).Prior to the establishment of CCD

174、Rs,few World Bank studies examined the impacts of climate change on poverty,with the notable exception of Hallegatte et al.(2016),which introduced the shock waves approach.Two main ex ante microsimulation approaches are used in CCDRs to assess the future distributional impact of climate change:(a)to

175、p-down approaches,consisting of the reweighting and behavioral approaches,and(b)the shock waves approach.Both approaches consist of two main steps:(i)using the latest household survey data,demographic projections,and the outcomes of macroeconomic models2 to project the distribution of households and

176、 household incomes into the future,and(ii)using predictions of the impact of climate changes on incomes and prices to estimate the impact of climate change on this future income distribution.Hernani-Limarino et al.(forthcoming)review the strengths and challenges of each method and offer guidance for

177、 applications.Table 2 is taken from this review and goes into more detail on how each step is done,and the main strengths and limitations of each approach.2.The two most commonly used macroeconomic models are a macro-fiscal model(MFMod,Burns et al.,2019)and full general equilibrium models Environmen

178、tal Impact and Sustainability Applied General Equilibrium(ENVISAGE)model(Van der Mensbrugghe,2010)and Mitigation,Adaptation,and New technologies Applied General Equilibrium(MANAGE)model(Van der Mensbrugghe,2020).21CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION P

179、rosperity Note Top-down reweightingTop-down behavioralShock wavesMethod used to establish baseline Demographic changes(age,schooling,location)and employment status changes incorporated through changes in the population weights in the survey Wages adjusted through residual growth to match labor produ

180、ctivity growth assumption Nonlabor incomes adjusted to match nonlabor incomes and tax/transfers changes assumptions Demographic changes(age,schooling,location)incorporated through changes in the population weights in the survey.Changes in employment(and corresponding wage changes)simulated from an e

181、conometric labor supply model Additional wage adjustment through residual growth to match labor productivity growth assumption Nonlabor incomes adjusted to match nonlabor incomes and tax/transfers changes assumptions Demographic changes(age,schooling,location)and employment status changes incorporat

182、ed through changes in the population weights in the survey.Wages adjusted through residual growth to match labor productivity growth assumption Nonlabor incomes adjusted to match nonlabor incomes and tax/transfers changes assumptionsBaseline model inputs Use demographic forecasts from global institu

183、tions for demographic changes Use macro model simulation without climate change for assumptions on changes in distribution of employment status(e.g.,activity,unemployment,and sector of employment),residual labor productivity growth,nonlabor income changes and tax/transfer changes Use demographic for

184、ecasts from global institutions for demographic changes Use macro model without climate change for assumptions on residual labor productivity growth,nonlabor income changes and tax/transfer changes Use demographic forecasts from global institutions for demographic changes Use a sample of a combinato

185、rial of historical trends for changes in distribution of employment status(e.g.,activity,unemployment,and sector of employment),labor productivity growth,nonlabor income changes and tax/transfer changes.The sample can be created with or without correlation between assumptions.If some of these variab

186、les are available from a macro model,it is possible to use a macro model simulation without climate changeClimate change impacts New set of changes in distribution of employment status(e.g.,activity,unemployment,and sector of employment),labor productivity growth,nonlabor income changes and tax/tran

187、sfer changes provided by a macro model simulation with climate change impacts New set of changes for labor productivity growth,nonlabor income changes and tax/transfer changes provided by a macro model simulation with climate change impacts Household specific climate shocks that reduce labor and non

188、labor income depending on the household characteristicsTable 2:A Summary of Microsimulation Approaches22CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Although there are some differences in projecting the distribution of incomes into the future,t

189、he main difference comes in how the impacts of climate change are dealt with.The top-down approaches take the outputs of a macro-model that uses damage functions to estimate the impacts of climate change on the economy.The predicted impacts on income and prices from these models are then used to pre

190、dict distributional impacts.The advantage of this approach is that the impacts on households are consistent with a macro model,but the disadvantage is that much of the heterogeneity of impacts on households is lost in this approach.The shock waves approach uses damage functions to directly estimate

191、impacts of climate change on households.This allows for much more heterogeneity in impacts to be retained.However,the predictions are not necessarily consistent with a macro-model and not all general equilibrium impacts of climate change impacts will necessarily be taken into account.Some of the imp

192、acts will be missed as a result.The shockwaves approach also has a much stronger treatment of uncertainty,running hundreds of baseline scenarios and multiple draws of climate scenarios within two extremes.Treatment of uncertainty Typically,one or two baseline scenarios versus two or more climate cha

193、nge scenarios Typically,one or two baseline scenarios versus two or more climate change scenarios Hundreds of baseline scenarios combined one by one with two climate impacts scenarios,or with random draws of climate scenarios taken within the two extremesAdvantages and disadvantages Macroeconomic co

194、nsistency ensured but requires a macro model Limits the set of households to the ones initially present in the survey General equilibrium effects of climate impacts are captured Climate impacts are only captured if they significantly impact employment and wages at the macro level,some of the heterog

195、eneity of impacts is lost Macroeconomic consistency ensured but requires a macro model Labor market dynamics modeled,but calibrations of behavioral equations may not hold in the long run General equilibrium effects of climate impacts are captured Climate impacts are only captured if they significant

196、ly impact employment and wages at the macro level,some of the heterogeneity of impacts is lost Macroeconomic consistency not required but can be run in the absence of a macro model Limits the set of households to the ones initially present in the survey Somenot allgeneral equilibrium effects of clim

197、ate impacts are modeled Captures the heterogeneity of impacts as well as targeted impacts on small segments of the populationSource:Hernani-Limarino et al.(forthcoming).23CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note THE WELFARE IMPACTS OF CLIMA

198、TE POLICIESAddressing the environmental impacts of human activities requires a comprehensive understanding of their effects and the implementation of targeted policy interventions.Fossil fuel use and degradation of natural resources come with significant environmental side effects.Negative externali

199、ties occur when the actions of individuals or firms impose costs on others that the actors do not consider.These externalities call for policy interventions to target the source of environmental harm and set the prices accordingly to reflect environmental damages while protecting the affected,vulner

200、able population from both climate change and the negative impacts of climate policies.Although 3.3.1.The Impact of Climate Policies on Welfare24CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note climate policies are often categorized based on whether

201、 they primarily contribute to mitigation or adaptation efforts,these objectives do not have to be mutually exclusive.Mitigation actions aim to reduce and/or stabilize greenhouse gas emissions,such as transitioning from fossil fuels to renewable energy or implementing carbon capture and storage or en

202、hance natural carbon sinks through forest and land management.Adaptation or resilience building actions aim to moderate harm or seize beneficial opportunities,including preventive measures like urban greening,early warning systems,and resilient infrastructure,as well as coping mechanisms such as sho

203、ck-responsive social protection or disaster management systems.Adapting the Hazard,Exposure,Vulnerability Framework for Welfare Analysis of Climate ActionThe hazard,exposure,and vulnerability conceptual framework can be adapted to explore how policy responses to climate change can impact welfare out

204、comes and generate distributional effects.Climate actions bring welfare benefits by improving the probability distribution of hazards and/or reducing exposure and vulnerability.For the purpose of the following discussion,we combine actions to reduce exposure and vulnerability into one category.Addit

205、ionally,climate actions can also have welfare implications separate from the effect they have on hazards,exposure,and vulnerability.They can carry a cost(either an actual cost or a cost in terms of opportunity when money is not used for other purposes)or bring an additional benefit that directly imp

206、acts welfare.We thus add an additional channel of impact to the IPCC framework.Figure 7 summarizes this adapted framework that we use to further discuss the welfare impacts of a climate policy on an individual through three main channels:(i)hazard,(ii)exposure and vulnerability,and(iii)other benefit

207、s or costs to households.Figure 7:Welfare Impacts of Climate Policy25CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note The first channelhazardinvolves the impact of climate policies on the alteration of the probability distribution of climate,leadin

208、g to a reduction or dampening of the intensity and occurrence of future climate hazards.The timing of this channel may vary depending on the policy.Mitigation measures,such as transitioning to low-carbon industrial processes and materials or implementing carbon capture and storage technologies,can s

209、tabilize the climate,but their effects are realized over an extended period(Martin et al.2014 in the United Kingdom,Andersson 2019 in Sweden,Metcalf 2019 in British Colombia;Rafaty et al.2021 in Europe).The IPCC Climate Change 2023:Synthesis Report suggests that significant and sustained reductions

210、in emissions can result in noticeable changes in atmospheric composition within a few years and a slowdown in global warming within approximately two decades.However,policies can also bring about immediate changes in local weather conditions by modifying the natural and built environment.For example

211、,urban trees can reduce the urban heat island effect and the risk of heat waves(Harlan et al.,2006;Ziter et al.,2019;Schwaab et al.,2021).In the second channelexposure and vulnerabilitypolicies can reduce households exposure and vulnerability to climate.Policies such as timely evacuation or planned

212、relocations for communities in uninhabitable areas enable households to move themselves or their assets to less hazardous locations,thereby reducing their exposure(Cools et al.,2016;Miller&Dun,2019).Policies can also reduce vulnerability by increasing the various forms of capital available to poor h

213、ouseholds,enabling them to better cope with climate shocks.For example,resilient infrastructure can reduce vulnerability to floods(Pant et al.,2018),while well-integrated markets and value chains can reduce price impacts associated with weather shocks(Burgess&Donaldson,2010;Baffes et al.,2015).Addit

214、ionally,policies can support households in pursuing economic diversification and resilient livelihoods,reducing their reliance on income activities that are more susceptible to climate-related hazards.Higher level of education may allow households to diversify income or switch sectors when a shock o

215、ccurs(Reardon,1997;Tesfaye&Tirivayi,2020).Public or private insurance instruments that pay out or provide transfers to households in bad weather outcomes(for example,shock-response social protection policies)also reduce vulnerability by increasing the ability of households to cope with the impacts.T

216、he strategic choice between focusing on reducing exposure or vulnerability must be informed by an assessment of whether it is exposure or vulnerability that drives the greater impact of climate on poor households welfare.While vulnerabilities are nearly always higher for poorer households,exposure m

217、ay or may not be higher for poorer households and may or may not be driving differential effects(see,for example,Banzhaf et al.,2019).The third channel involves the costs and benefits of climate policies in relation to households accumulation,use of,and return to assets that are independent of clima

218、te impacts.This policy-induced change in welfare can be positive;for example,investments in education or health can increase the returns to households human capital by increasing their productive capacity and,subsequently,their income.It can also be negative;for example,removal of energy subsidies o

219、r the introduction of carbon pricing may reduce the net returns earned from livelihoods that use carbon(Dorband et al.,2019).In addition,given constrained public resources,financing climate action could come at the cost of reducing other welfare-enhancing investments.It is important 26CLIMATE AND EQ

220、UITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note to consider the direct and opportunity cost of financing climate action in assessing the net welfare impact,though accurate costing of climate financing is challenging because of a lack of uniform methodologies,es

221、pecially for adaptation,and standardized reporting on climate finance.3 There are three important points to note for welfare analysis:1.Environmental externalities mean that the benefits from climate action that improves the distribution of hazards are likely to be felt by many more people than are

222、impacted by policy-induced changes in welfare.This means that while the costs of climate action may be felt by few,the benefits will be enjoyed by many.Importantly,in the case of climate change,the externality extends across countries,and also across generations(see point 3).The fact that the extern

223、ality is across countries requires a separate consideration to cross-country issues for policy making.2.There can be considerable heterogeneity across households in the magnitude and direction of the second(exposure and vulnerability)and third(policy-induced change in welfare)channel in figure 7.Thi

224、s means that the overall welfare impact of a climate action can be negative for some households while positive for others.For example,the cost of switching from coal to renewable energy is higher for coal miners who lack human capital related to green skills(Hanson,2023).Nevertheless,a comprehensive

225、 package of policies,including training programs to reskill and upskill coal miners,can improve their welfare.Such programs not only provide an alternative to an industry that is becoming obsolete but also have the potential to increase their income(Pao-Yu et al.,2020).3.The full beneficial impacts

226、of climate actions on hazards are realized over the long run(Tomorrow in figure 8),whereas the costs of climate actions are more likely to be felt in the near term(Today in figure 8).However,future benefits are discounted when they are valued today and discount rates can vary across peoplethey are o

227、ften higher for poorer people(Tanaka et al.,2010;Haushofer&Fehr,2014)and between citizens and policy makers(policy makers often discount the future at high rates).While a discount rate has to be chosen for policy analysis,it is important to do robustness checks for different discount rates,to see ho

228、w that changes the valuation of different policies(for an example,see Clarke&Hill 2013).The total social welfare impact of a policy on a society will be the sum of the welfare impacts on each person across the welfare distribution,taking into account discount rates and social welfare weights.There c

229、an be trade-offs across different generations and groups of people.3.For some global estimates,see World Bank and IMF(2022).27CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note We can reflect this using the equations set out in section 2.The welfare

230、impact of climate action implemented at time t(Policy_t)is the sum of the policys impact on W_ik and on the aspect of welfare that is not dependent on weather outcomes,This can be written as the impact of the policy on the hazard distribution,the vulnerability of a household with a given exposure,an

231、d the welfare impacts independent of climate,given by g(.)As noted in point 3 above,many policies impact h_kt only in the future.Consider a policy that only impacts the h_kt,at time t+n,but affects household assets in the present.The discounted expected welfare impacts(V_ik)of Policyt can be written

232、 as where _i reflects the rate at which individual i discounts the future.While the benefits of mitigation actions are often realized in the future through the first channel,there can be both short-and medium-term costs and benefits through the second and third channels.These policies have a cost no

233、w and there is thus a trade-off between paying now(whether in monetary terms or in growth forgone)and benefiting in the future.These trade-offs can take various forms,including potential increases in energy prices and the prices of other inelastic goods(Boyce,2018).They can also involve shifts in se

234、ctoral labor demand,requiring adjustments in the workforces and skill sets(Borissov et al.,2019;Carbone et al.,2020).Furthermore,mitigation actions may require investments in new production processes,green technologies,and infrastructure upgrades(Blanco et al.,2022).They may bring about changes in w

235、ays of living,consuming,and thinking(Adger et al.,2013).Moreover,mitigation actions can lead to changes in land-use patterns,shifts in agricultural practices,and the restoration of natural systems(Hurlbert et al.,2019).Although trade-offs are often most evident in mitigation actions,they can also ar

236、ise in adaptation actions that redirect resources toward coping with disasters,potentially affecting productive uses of those resources(Antwi-Agyei et al.,2018).Figure 8:The Welfare Impacts of Climate Policy:Taking Timing Into Account(Eq.5)(Eq.6)(Eq.7)Note:Changes in a households exposure and vulner

237、ability are labeled simply as vulnerability for ease of exposition28CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Policies that bring the largest welfare gains across time should be prioritized.These may be policies with positive welfare impacts

238、 across all three channelsmitigating future hazards,reducing exposure and vulnerability,and generating income for low-income householdsor policies that have large benefits through one or two of the channels with little or low costs from the other channels.These policy choices are being made under co

239、nsiderable uncertainty about future states of the world.In reality,hk,t+n.is not known;instead,we have expectations over this with uncertainty around these expectations.The risk of investing in the wrong thing is very real,and policy making is being undertaken in this environment.This makes the idea

240、 of no-regrets policies particularly important.No-regrets policies bring benefits today because of contemporaneous(or near-contemporaneous)impacts on the hazard distribution,or in reducing exposure of vulnerability,or policies that bring benefits of income growth regardless of the weather.This is an

241、other reason why prioritizing triple-and double-win policies is particularly important.Triple Wins for Poor PeoplePolicies that have positive welfare impacts across all three channels for people at the bottom of the income distribution can be thought of as triple-win policies for poor people.Althoug

242、h few policies may be triple wins,clear sets of policies fall into this category.The IPCC Sixth Assessment Report focuses on adaptation and contains a useful summary of policies that reduce vulnerability while bringing improvements in the hazard distribution and income benefits(see figure SPM.4(b)in

243、 IPCC 2022).We highlight a few areas where policy support is likely to bring triple wins:Climate-smart agricultural practices increase agricultural productivity while sequestering carbon and reducing the vulnerability of agricultural income to extreme weather events.For example,Sahel farmers use low

244、-cost,efficient traditional practices,such as agroforestry and rainwater harvesting techniques,to accumulate rainfall,reduce runoff,and restore soils.Rainwater harvesting and agroforestry have been shown to increase soil carbon sequestration at the estimated rates of 839 kilograms and 1,359 kilogram

245、s of carbon per hectare per year,respectively,in Africa(World Bank,2012).In Niger,these practices were found to increase yields(Aker&Jack,2021),which is consistent with the findings of older studies that showed that yields were 1630 percent higher among farmers implementing these techniques in Niger

246、 and Burkina Faso(Matlon,1985).These practices also reduce vulnerability to low rainfall,allowing yield increases in low rainfall years.4 Policies that protect forests and mangroves can generate incomes for local communities while improving the climate and reducing vulnerability to weather extremes(

247、Zaveri et al.,2023).For example,in the United States,a large-scale reforestation program in the 1930s across six Midwestern states led to enduring impacts over several decades of increased precipitation and reduced temperatures as well as increased crop yields by 1122 percent(Grosset et al.,2023).Ha

248、lting annual mangrove deforestation in Indonesia could reduce emissions by 1031 3.2.Policies with Minimal Trade-off4.For more information on the Sahel example,see Baquie&Hill(2023).29CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note percent of estim

249、ated annual emissions from land-use sectors at present(Murdiyarso et al.,2015).Additionally,mangroves serve as barriers against cyclones,storms,and tidal surges and as a main source of income for nearby households(Das et al.,2022).Improving access to clean and improved energy sources can also bring

250、triple wins.Over half of all wood harvested worldwide is used as fuel which contributes to black carbon and other greenhouse gas emissions but also accelerate forest degradation and deforestation(Hutton et al.,2006;Bond et al.,2013;FAO,2023).The depletion of wood resources leads to increased time an

251、d labor burden to collect firewood for households,particularly for women.Additionally,traditional biomass stoves increase health risks associated with poor air quality,even resulting in premature deaths(Person et al.,2012).Transitioning to improved and cleaner cooking stoves thus significantly contr

252、ibutes to mitigating climate change,reducing exposure and vulnerability through decreased deforestation and habitat destruction,and improving household welfare by reducing health risks and pressures on womens time use.Implementing energy-saving measures in buildings not only decrease energy consumpt

253、ion and energy costs,thereby increasing disposable income for households,they also reduce exposure to indoor air quality pollutants as well as extreme climate events such as heat waves or cold spells(World Bank,2019a).Reducing inefficiencies in trade,particularly in road freight transport,presents a

254、n opportunity for a triple-win policy.Trucking inefficiencies are a significant challenge,often exacerbated by regulations that limit competition and lead to inefficient fleet management or the prevalence of empty cargos.In Central America,imperfect competition accounts for at least 35 percent of me

255、an prices on national routes and improving cost efficiencies and increasing competition could significantly reduce freight transport prices(Osborne et al.,2014).Addressing these inefficiencies can simultaneously impact emissions positively,reduce vulnerability by better integrating markets,and promo

256、te economic growth.This initial list of actions that offer triple wins for households at the bottom of the income distribution across various contexts needs further work to expand it.While the potential for triple wins exists across different geographical contexts and sectors,the key policy question

257、 becomes how to identify the constraints that prevent progress in these areas,and to design policies to overcome these challenges.For instance,climate-smart agricultural practices or agroforestry may require a fundamental shift in traditional techniques,necessitating new skills or knowledge that far

258、mers may not initially possess.Training increased the adoption of soil conservation practices in the Sahel.Farmers trained on traditional soil conservation practices in the Sahel were 90 percent more likely to adopt these practices,and 50 percent more likely to have neighbors adopting the technique

259、than untrained farmers(Aker&Jack,2023).However,providing this type of knowledge at scale can be challenging.Financial constraints are another common barrier,as up-front costs might be prohibitive for low-income households,and credit products are often not available,particularly for investments with

260、long-run benefits.Addressing these constraints can significantly increase take-up.In Poland,energy-saving measures in buildings were supported through the Clean Air Priority Program,which 30CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note provided

261、financial and operational schemes to support low-income single-family building owners in upgrading their heat sources and investing in thermo-modernization.Even when people have enough information,training,and financial resources to access these technologies,behavioral barriers can hinder their poss

262、ibility to access themfor example,the factor of risk aversion;farmers might be hesitant to adopt new practices due to uncertainty about the outcomes.Moreover,cultural and social norms can influence the willingness to adopt new methods,as practices deeply ingrained in community identity may not be ea

263、sily altered.Importantly,the existing policy environment and the incentives it provides can impede widespread take-up in these areas.Traditional agricultural support through input subsidies,output payments,or market price interventions often results in extensive environmental damage(Damania et al.,2

264、023).These subsidies can distort farmers agricultural production decisions,discouraging climate-smart agricultural practices and natural resource management.5 Refocusing on triple-win strategies may require a strategic shift in policy,repurposing agricultural subsidies toward climate-smart agricultu

265、re and resilient natural resource management.Existing incentives also shape the design and implementation of climate actions.For example,research by Healy&Malhotra(2009)demonstrates that voters tend to reward incumbent politicians for allocating funds to disaster relief efforts but not for investmen

266、ts in disaster preparedness.Recent work by Hallegatte et al.(2023)explores the political economy dimensions in more detail.Cash transfers that support climate-smart agricultural practices and natural resource management can simultaneously address climate change,enhance resilience,and improve livelih

267、oods.Ethiopias flagship public works program alleviated poverty and food insecurity,bolstered community resilience against shocks(Wiseman et al.,2010),and increased tree cover through soil and water conservation and reforestation initiatives(Hirvonen et al.,2022).6 In Burkina Faso,conditional enviro

268、nmental cash transfers raised household consumption by 12 percent and reduced severe food insecurity by 60 percent while aiming to increase the survival rate of trees planted on degraded forest lands(Adjognon&Guthoff,2021).There is thus an important role in identifying both the high-value triple-win

269、 opportunities and the constraints that impede progress in a given context.The type of work undertaken in the Rural Income Diagnostic tool can help in this regard.For example,in Burkina Faso the tool highlighted the opportunity of soil conservation practices for agricultural income growth for poor h

270、ouseholds and the knowledge,credit,and policy incentives that constrained the realization of this opportunity(World Bank,2019c).Double Wins for Poor PeopleWhile it is useful to identify the triple wins,many policies that offer significant benefits in reducing vulnerability and improving income growt

271、h,even after accounting for their costs,have minimal impacts on the future hazard distribution.These policies are just as important to prioritize.Indeed,it is not the number of areas of positive impact 5.It is important to caution that the process of removing input subsidies may have significant imp

272、acts on households.Ghose et al.(2023)estimate that a fertilizer import ban in Sri Lanka leads to declines in crop yields by 114 percent across crops and welfare for both landowners and workers.While workers suffered less than landowners everywhere,workers living in heavily agricultural regions still

273、 face as much as a 3 percent income reduction.6.Analyzing a similar public works program in Malawi,Beegle et al.(2017)find no evidence that the program improves food security and suggestive evidence of negative spillovers to untreated households.31CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE

274、 IMPACTS AND GUIDE POLICY ACTION Prosperity Note that matter but the overall welfare benefit from each policy.In this section,we highlight some of the evidence on what these policies are.Additional review work will add to this set of examples.For example,mobile money spurs development,thereby increa

275、sing welfare(Batista&Vicente,2023).When a weather crisis strikes,it also allows households to quickly receive transfers or remittances quickly from relatives or migrant family members who live elsewhere(Jack&Suri,2014).Similarly,better access to roads in remote areas increases access to markets,good

276、s,and services,thereby bringing development.When drought reduces local food availability,improved access to markets reduces the impact of this weather shock on local food prices(Burgess&Donaldson,2010).Education increases an individuals ability to earn incomeand the gain in lifetime earnings usually

277、 more than offsets the cost of public spending(Hendren&Sprung Keyser,2020)but it also allows households to switch sectors when climate shocks reduce returns in the sector in which they are engaged.Furthermore,a recent study shows each additional year of education leads to increases in pro-climate be

278、liefs,behaviors,most policy preferences,and even green voting across 16 European countries(Angrist et al.,2023).Moreover,the impact of education on voting is significant and equates to a substantial 35 percent increase.None of these policies and similar policies would be considered adaptation invest

279、ments designed to reduce the vulnerability of households to climate events,but they can be highly effective in reducing vulnerability.Without actions to reduce the carbon footprint of goods and energy consumed in a country,development policies,like many growth-enhancing policies,can increase emissio

280、ns.At low levels of growth or for very poor countries,growth in emissions may have a negligible impact on the hazard distribution in the future(Wollburg et al.,2023).The anticipated welfare impact of these policies is thus expected to be very high.In middle-income countries,or in scenarios where gro

281、wth rates are high,the increase in emissions is substantial,potentially accelerating the worsening of future hazard distributions(Wollburg et al.,2023).For example,Gertler et al.(2016)demonstrate the nonlinear relationship between income and both asset ownership and energy consumption in Mexico.Poli

282、cies that promote renewable energy and increase the cost of carbon can sustain growth and alleviate poverty while reducing emissions.This approach aligns with key findings from evaluating policy packages in the Pakistan CCDR(World Bank,2022f).32CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IM

283、PACTS AND GUIDE POLICY ACTION Prosperity Note In many cases,however,the cost of reducing hazard,exposure,or vulnerability is not offset by resulting income growth.There is a net cost for these actions.In this section,we consider the costs arising from reducing exposure/vulnerability(with a focus on

284、vulnerability),and in the next section we consider the costs arising from improving the hazard distribution.In the case of vulnerability,many of the available risk reduction and risk management strategies come with a cost for average incomes.7 For example,in the case of risk reduction,agricultural p

285、ractices that reduce vulnerability by reducing yield losses under weather extremes often also result in lower agricultural income in normal weather years.Kala et al.(2023)provide a review of this evidence.One notable paper is by Hultgren et al.(2022),who show that agricultural practices that adapt t

286、o rising temperatures depress yields during periods of moderate temperatures.In the case of risk management,the cost of private insurance is always higher than the actuarial fair price of insurance.The cost of publicly financing shock-responsive safety nets may or may not be recovered through the in

287、come growth enabled;there is currently not enough evidence in this area to say.The welfare benefit to spending on reducing vulnerability comes from the fact that individuals are risk averse and thus prefer to reduce their consumption to minimize its variance,in particular the downside losses.Given t

288、here is a cost to reducing the variance in consumption,no variance in consumption is not always the optimal solution.Welfare is maximized when the variance in consumption is reduced to acceptable levels given the cost of reducing the variance of consumption and risk preferences.Policies that increas

289、e the availability of low-cost risk reduction and management strategies need to be prioritized.The framework set out by Ehrlich&Becker(1972)highlights the need to think about optimizing investments in risk reduction and risk management concurrently.The framework examines the interaction between mark

290、et-provided insurance,self-insurance,and self-protection,defining market insurance as a contract in which an individual pays in advance to reduce losses when they occur,self-protection as actions taken to reduce the probability of loss,and self-insurance as actions taken to reduce the size of loss w

291、hen it occurs.The authors note that actions that reduce the probability of loss often also reduce the size of the loss when this occurs,and this has implications for investments in both self-insurance and in the demand for market insurance.The key insight is that the availability of market insurance

292、,if appropriately priced,need not reduce the demand for self-protection,avoiding the usual concerns with moral hazard.While the model self-protection refers to actions undertaken by individuals,it could also be public actions that need to be taken to protect the well-being of those most at risk.Such

293、 actions include a range of risk reduction investments,which simultaneously change both the probability and the size of losses.These include efforts to green cities,climate-proof key infrastructure,increase the energy efficiency of buildings,and improve water management,as well as investments in cli

294、mate-resilient agricultural practices and landscape restoration and reforestation,among others.3.3.Addressing Trade-offs:Reducing Vulnerability at a Cost to Income Growth7.Risk reduction strategies are often called ex ante strategies,in that action is taken that reduces the impact of the shock prior

295、 to the shock occurring.They are also referred to as income smoothing.Risk management strategies are often called ex post strategies,in that they reduce the impact of the shock once it has occurred.They can also be referred to as consumption smoothing.33CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND W

296、ELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Self-insurance refers to a range of actions that individuals take to manage shocks to income without relying on formal risk transfer arrangements.This could be holding savings to draw on when income falls,relying on informal networks for a tempo

297、rary consumption loan,or increasing income from other sources.Hill et al.(2021)and Kala et al.(2023)look at the degree to which these strategies are used by poor households and their impact.Market insurance can be reframed as formal insurance.Market insurance refers to contracts in which there is an

298、 up-front payment to a second party that undertakes to provide income in the event of a state-contingent realization.In practice,although impactful when provided(as discussed in section 2),cost-effective insurance products are not widely present for the types of climate risks faced by poor and near-

299、poor households in low-and middle-income countries and take-up tends to be low(see Hill et al.2021 for a review).Some types of product do show promise(such as livestock insurance)and supporting the development of these markets may become increasingly important.However,in principle,such state-conting

300、ent payments could be financed and possibly also managed by the statesay,through adaptative social protection schemes that provide support to farm households faced with crop failure caused by drought,flood,or other extreme weather event,or support poor households if food prices rise above a threshol

301、d value because of a climate-related event,and so on.Programs that have built-in automatic stabilizers,such as unemployment insurance or self-targeted employment guarantee schemes,automatically target those in need as a result of a climate disaster through self-selection.However,unemployment insuran

302、ce covers few people in contexts where rates of self-employment or informal employment are high.When employment guarantee schemes are in place,there is evidence that they play a protective role(Gehrke,2019;Gelb et al.,2022;Afridi et al.,2022).There is also considerable evidence that cash transfers h

303、elp households manage shocks.However,the evidence is predominantly for the impact of regular cash transfers(see Hill et al.2021 for a summary).Rigorous evidence on the impact of cash transfers provided in response to a disaster is much more limited,but it also shows significant long-run welfare bene

304、fits.In Fiji,an impact assessment conducted three months after a tropical cyclone found that households that received cash transfers recovered more quickly.For example,they were 810 percent more likely to have recovered from housing damage than non-beneficiaries(Mansur et al.,2018).Assessing the sam

305、e cash transfer program,Ivaschenko et al.(2020)use a sharp regression discontinuity design to show that beneficiaries who received cash transfers recovered much more quickly than those who did not.Del Carpio&Macours(2009)and Macours et al.(2013)both use a cluster RCT to evaluate a conditional cash t

306、ransfer(consisting of a transfer paid every two months)implemented by the Nicaraguan government in the aftermath of a drought.The evaluations document positive persistent impacts on height-for-age scores,cognitive and psycho-social development,and child labor(particularly for boys).One paper rigorou

307、sly examines the impact of anticipatory cash transferscash transfers provided before the full impacts of a disaster materializeand similarly finds strongly positive impacts.Pople et al.(2021)exploit administrative constraints experienced during the rollout of anticipatory cash transfers in Banglades

308、h to compare treated households with otherwise comparable households that did not receive the cash transfer.Households receiving the transfer were less likely to go without 34CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note eating during the flood

309、and reported higher child and adult food consumption(4 percent and 7 percent,respectively)after the flood.Asset losses and costly borrowing were lower and earning activity was higher for those receiving the transfers.Lastly,a significant concern when policies overlook incentives is the risk of malad

310、aptation.Responses to climate change can inadvertently create or aggravate risks through maladaptation actions.For instance,well-intentioned investments aimed at providing short-term relief may lead to costly lock-in effects.Over time,path dependence can set in and make corrective measures more diff

311、icult and costly to implement.An example of this is the construction of sea walls,which can cause coastal erosion farther down the coastline,or irrigation practices upstream that exacerbate water scarcity downstream.A comprehensive study referenced in the The IPCC Sixth Assessment Report,which analy

312、zed over 300 climate change adaptation initiatives,discovers that approximately a third of these efforts resulted in unintended and negative consequences(New et al.,2022).Such findings underscore the need for careful planning and implementation,as these maladaptive actions can worsen inequalities an

313、d increase vulnerabilities in affected communities.This issue is particularly critical in relation to irrigation infrastructure and commonly implemented insurance schemes,which are prone to well-documented moral hazard problems.3.4.Addressing Trade-offs:Reducing Hazards While Minimizing Welfare Cost

314、sTransitioning toward a low-carbon,climate-resilient economy,often referred to as the green transition,usually involves a trade-off between paying now and future benefits.These policies bring future climate benefits by altering the probability distribution of hazards(the first channel in figure 8s T

315、omorrow panel),but they have a cost now(the second and third channels in figure 8s Today panel).In addition,at a given point in time,the cost of the green transition is higher for specific people even though the future benefits are shared by all.Short-term costs,such as higher energy prices or job l

316、osses in carbon-intensive sectors,can be particularly hard for poorer people to manage.Therefore,assessing how the green transition impacts poor and vulnerable people and designing policies to reduce negative impacts are essential.To manage the trade-off,the goal should be to pursue a“just transitio

317、n”(see box 2 for a discussion of how this term has been used in the World Bank and other multilateral development banks)with a policy mix of climate mitigation policies accompanied by compensatory actions that would increase the benefits for poor people while minimizing the costs.For example,revenue

318、 from carbon taxes could be recycled not only to targeted transfers but also to productive investments in reskilling and upskilling,facilitating mobility,and reducing market frictions and credit market failures,among others.Such investments actively support poor households in transitioning rather th

319、an just compensate them for losses.35CLIMATE AND EQUITY:A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note There are two key aspects of a just transition:8 1.Minimizing the cost to real household consumption and supporting the transition to clean energy consumption for

320、 the bottom quintiles and vulnerable groups.Poor and vulnerable households often face higher energy prices caused by reforms aimed at reducing fossil fuel subsidies or implementing carbon taxes.Energy costs can be a large share of the budget of poor and vulnerable households,as they tend to be ineff

321、icient users of energy because of outdated appliances and poorly insulated housing.When policy reform increases energy prices,poor and vulnerable households need compensation to ensure that poverty does not go up and deepen,as well as support to transition to more efficient appliances,better-quality

322、 housing,and cleaner transport use.Indirect subsidies,like those for energy,are often equivalent to a higher share of market income for poorer households(World Bank,2022h).Removing these subsidies without offering compensatory measures would disproportionately affect poor households.Figure 9 present

323、s an incidence analysis from 94 economies,illustrating the amount that would be lost in household consumable income(shown as a share of market income)if energy subsidies were removed.At the 2019 UN Secretary Generals Climate Action Summit,the multilateral development banks(MDBs)collectively pledged

324、to“support a just transition that promotes diversification and inclusion”and developed a set of high-level principles to guide MDB support for a just transition.a Among these,principle 4 emphasizes that“MDB support for a just transition seeks to mitigate negative socio-economic impacts and increase

325、opportunities associated with the transition to a net zero economy,supporting affected workers and communities,and enhancing access to sustainable,inclusive and resilient livelihoods for all.”b At the World Bank,the Just Transition for All Initiative primarily focuses on the shift away from coal.Thi

326、s initiative aims to“put people and communities at the center of the transition”and“work with stakeholders to create the plans,policies,and reforms needed to mitigate environmental impacts,support impacted people,and build a new clean energy future.”c The main emphasis is on facilitating the transit

327、ion for workers and communities affected by the closure of coal mines and power plants(Calice&Demekas,2023).However,the World Bank undertakes a wide range of work that supports countries to transition to a lower-carbon growth path,reflecting the people-centered approach outlined in the World Bank Gr

328、oup Climate Change Action Plan 2021-2025.BOX 2:What Is Meant by a“Just Transition”?a.High level MDB statement:For publication at the UNSG Climate Action Sumit,22 September 2019.https:/www.adb.org/sites/default/files/page/41117/climate-change-finance-joint-mdb-statement-2019-09-23.pdf.b.While the Wor

329、ld Bank Group was not part of the MDB group that prepared the principles,inputs from the World Bank Group were included.See MDB Just Transition High-Level Principles(https:/www.eib.org/attachments/documents/mdb-just-transition-high-level-principles-en.pdf).c.Just Transition for All:The World Bank Gr

330、oups Support to Countries Transitioning Away from Coal,Understanding Poverty,Extractive Industries,World Bank,https:/www.worldbank.org/en/topic/extractiveindustries/justtransition.8.We focus here on welfare impacts rather than aspects related to the process of a just transition.36CLIMATE AND EQUITY:

331、A FRAMEWORK TO UNDERSTAND WELFARE IMPACTS AND GUIDE POLICY ACTION Prosperity Note Figure 9:Subsidy Incidence Curve(Benefits as a Percentage of Market Income,by Decile)Source:World Bank,2022h.Compensatory measures,such as social assistance,can help reduce the impact on real household consumption for

332、poor people when energy prices rise,as seen with carbon taxes or the elimination of energy subsidies.However,the current design of social protection structures is not entirely effective in protecting the poor and vulnerable from rising energy prices.The World Bank(2022h)highlights that spending on s

333、ubsidies dwarfs social protection spending in lower-middle-income countries(LMICs)and low-income countries(LICs).This finding is confirmed in Mukherjee et al.(2023).A recent study by Hoy et al.(2023)shows the importance of considering other types of compensatory measures,such as investments in roads and education.They find that public support for reducing energy subsidies is low in the absence of