Redistribution mechanism essential to make Germany’s CO2 pricing socially acceptable – researchers

The German carbon pricing system for heating and transport needs to be supplemented with a redistribution mechanism to ensure that low-income households are not disproportionately burdened with climate action costs, researchers of the Potsdam Institute for Climate Impact Research (PIK) and the Rhineland-Westphalia Institute for Economic Research (RWI Essen) say in a joint analysis. “The best solution here would be to use the proceeds from CO2 pricing to reduce the taxes and levies on electricity,” the researchers argue. Once CO2 prices become significantly higher than the current 25 euros per tonne, the mechanism should include a direct redistribution component that transfers money back to individuals. “Without such a balancing mechanism, the pricing system in the long run could develop the potential for social unrest, as prices need to increase to achieve the climate targets,” the researchers say. While carbon pricing is “an efficient and effective climate action tool,” the current system puts much greater strain on low-income households, who have to pay a bigger share of their total available income on energy. Together with the University of Oxford, the research institutes surveyed about 6,000 households’ willingness to pay for climate action efforts and found that it is clearly correlating with available household income and the level of CO2 pricing. While 54 percent of respondents in general were ready to pay for climate action, the share dropped to 40 percent in the lowest income group. But the willingness to partake financially increased significantly once respondents were told that the proceeds would be redistributed, bringing the share of those willing to participate among the lowest income groups to 60 percent even at a price level of 50 euros per tonne. Instead of using a wide array of different support schemes, such as the buyers’ premium for e-cars, PIK and RWI advocate for a comprehensive overhaul of the system that is targeted at protecting low- and average-income households.

The outgoing government coalition already decided to use part of the revenues of the CO2 price to lower the renewables surcharge for power consumers (EEG surcharge), but could not agree on a per capita payment. The social implications of carbon pricing have been one of the more controversial climate policy topics in Germany’s election campaign and is likely to also figure prominently in coalition talks between the Social Democrats (SPD), the Green Party and the Free Democrats (FDP). While the Greens and the FDP advocate higher prices and per capita refunds, the SPD has said it aims to stick with the price increase already agreed.