CO2 pricing is one of the most efficient climate policy instruments – but it represents a much higher burden for poor families than for high-income people. Two research institutes believe they have found a solution to this problem.
The Leibniz Institute for Economic Research RWI and the Potsdam Institute for Climate Impact Research (PIK) use a two-stage model for social compensation for additional costs for climate protection. First of all, the income from CO2 pricing should be used to reduce taxes and levies on electricity, according to a joint analysis. In the event of higher CO2 prices, additional income should then flow back to the population through a per capita reimbursement.
“Without this kind of compensation, the pricing could be socially explosive in the long term, as the CO2 price will have to rise sharply in the coming years in order to achieve the climate targets and effectively limit climate risks,” emphasized the experts. A broad compensation mechanism should therefore ensure that low-income households are not burdened disproportionately.
“An effective climate protection instrument”
In principle, RWI and PIK expressly advocate a significant increase in the CO2 price. This is “an efficient and effective climate protection instrument”. However, proportionally poorer households would be more heavily burdened by higher CO2 prices than wealthy people, because they would spend a larger part of their income on goods such as gasoline or heating oil. Accordingly, the approval of higher CO2 prices is also lower in lower income groups than in higher ones.
It is therefore important to have a compensation mechanism that “particularly benefits low and average earners”, emphasized the experts. Funding programs that have been decided so far, such as a higher commuter allowance or premiums for the purchase of electric cars, are “overall unsuitable” for this purpose.
The institutes therefore initially recommended easing the electricity price as being easy to implement. This is also particularly useful because more green electricity should also be used in sectors such as transport and buildings.
Redistribution only at higher CO2 prices
“In the medium term, additional income from CO2 pricing should be distributed in the form of a flat-rate repayment in which all citizens received the same amount,” it continues. Legal and administrative prerequisites should already be created for this. However, due to the associated administrative effort, this should only be implemented at higher CO2 prices than at present.
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“Climate policy can very well be socially just if it considers the balance between different income groups from the outset,” emphasized PIK director Ottmar Edenhofer. “On the other hand, an unchecked climate change with more extreme weather conditions would be socially unjust because it is expensive” and it affects lower earners more than high earners.
“The CO2 price is by far the most efficient instrument to achieve the climate goals and should therefore be the focus of future climate policy,” said RWI President Christoph Schmidt. “But whether the population supports higher CO2 prices will largely depend on how the revenue from the pricing is used.”