The political logic of phasing out fossil fuel jobs

Abstract

A ‘just transition’ calls for compensations to fossil fuel workers whose jobs will be lost because of the clean energy transition. The ethical case for a just transition acknowledges the hardship of vulnerable workers. In contrast, I examine the political case for a just transition. The logic of such a case remains hazy and under-theorized. I draw on the insights of ultimatum games to understand the strategic dimension of the relation between governments and fossil fuel workers. In a successful just transition, the government compensates workers in exchange for their exit from the fossil fuel industry. This ensures a faster clean energy transition. Yet the prospects of such an agreement depend on several parameters: the quality of outside options available to workers, their cost of mobilization, and the climatic benefits that the government obtain from a fossil fuel phaseout. I show that a government's credibility is also critical. This theoretical exercise helps make sense of several otherwise puzzling patterns in just transition policies and offers guidance on critical policy issues.

Key policy insights

• Just transition policies can break the carbon deadlock by incentivizing the exit of fossil fuel workers.
• The ability of the government to induce the exit of labour depends on climatic benefits, fossil fuel wages, outside option wages, and anti-government mobilization costs.
• Lack of government credibility, which can be caused by political risks, capacity constraints, or low trust, reduce the prospects of phaseouts and increase their cost.
• Unions play an ambiguous role: they increase wages and reduce mobilization costs, but can improve outside options, solve coordination failures, and reduce transaction costs.
• Fossil fuel firms can and do use financial and non-financial strategies to reduce the mobility of their workers.