Do climate change policies affect labour market distortions? Empirical evidence from China's low-carbon city pilots

To mitigate climate change while ensuring that the substantial benefits of a green economic transition are widely shared, the concept of a just transition has emerged as a pivotal element in climate strategies. Although the effectiveness of climate policies has been a subject of ongoing debate, the integration of just transition principles is often overlooked as a key component. This study employs China’s Low-Carbon City Pilot policy (LCCP) as a quasi-natural experiment and uses a time-varying difference-in-differences (DID) methodology to assess the impact of LCCP on wage distortions within firms. Using data from listed companies between 2006 and 2022, our analysis shows that the low-carbon policy itself may be a source of inequity, disproportionately benefiting capital at the expense of labour, thus exacerbating wage distortions and preventing labour from receiving fair compensation. This inequity undermines the principles of a just transition, as the allocation of policy resources tends to favour large firms, enhancing their pricing power and diminishing labour market flexibility. The economic outcomes of LCCP are mixed: while it accelerates the growth of capital share, it also leads to an unequal distribution between capital and labour. Furthermore, our exploration of the role of export trade in mitigating these distortions reveals that exports actually widen the disparity in wage distortions. Our study underscores the urgent need to prioritize equity in climate policies and improve labour allocation efficiency within climate action frameworks. We aim to provide decision-making support for the design and implementation of more equitable low-carbon policies in developing countries.Key policy insights Empirical evidence suggests that LCCP has led to unfair compensation for workers. These findings aim to guide the design of more equitable low-carbon policies in developing countries.We recommend that while mitigating climate change, governments prioritize reforms in factor markets to maintain order and protect workers’ rights.Policy evaluation should account for regional and firm-specific impacts, balancing regulatory oversight of large firms with targeted support for small and medium-sized enterprises.Addressing wage distortions requires confronting the systemic biases in policy execution that favour large firms and marginalize smaller ones.