DIW: Climate money should socially compensate CO2 price

12 .06.2023

Source: energy & management powernews

The climate money as a repayment of the CO2 price on fuels would help especially  low-income households, according to the German Institute for Economic Research (DIW).

In the coalition agreement, a climate money was agreed. With this, the increase in CO2 pricing in the sectors of transport and heat should be compensated uniformly per capita. However, so far there is no draft on this from the FDP-led Federal Ministry of Finance. In view of rising energy prices, the climate money is important to cushion the uneven distribution of the burden, warns the German Institute for Economic Research (DIW) in Berlin.

The pricing of greenhouse gases continuously increases energy prices. Households with low incomes are hit particularly hard by these price increases; at the same time, they would benefit directly from per capita climate money, the scientists say. Rare cases of hardship, however, would require additional government support instruments. The study by the DIW's government department was based on data from the German Socio-Economic Panel (SOEP).

Ten percent loss in real income possible by 2026

Study co-author Stefan Bach said the burden of CO2 pricing in the heating sector was particularly unevenly distributed at the expense of low incomes. Across all households with gas and oil heating, net incomes would suffer an average real income loss of 1.5 percent compared to 2019, he said, assuming a CO2 price of 60 euros per ton and unchanged consumption.

"This increase in energy costs affects lower income groups relatively more, as they have to spend a larger share of their household budget on fuel and heating," Bach explained. In the 2026 scenario, the price increase corresponds to 3.5 percent of net income for the lowest-income 10 percent of the population and less than 1 percent for the highest-income 10 percent.

Climate change and adjustment assistance needed

At the long-term projected CO2 price of 150 euros per ton, the average real income loss increases to 2.8 percent, three-quarters of which is due to the CO2 price. "Our study shows that poorer households benefit significantly more from a uniform climate money, where people in all income groups receive the same annual per capita amount," said co-author Hermann Buslei. The uniform climate money could be supplemented by adaptation assistance, he added.

At a CO2 price of 60 euros per ton in the heat and transport sectors, the state would take in about 14 billion euros a year, of which it could pay out a per capita flat rate of 170 euros. At 150 euros per ton of CO2, an annual climate money of 422 euros could be paid out. The per capita scheme favors families with many children, for example, while other households may face above-average burdens. "If a low-income household is affected by an above-average burden, further targeted assistance becomes necessary," emphasized Stefan Bach.

CO2 pricing alone is not enough

The extent to which a sustained increase in the CO2 price in the heating and transport sectors contributes to a reduction in emissions from private households depends on various factors, according to the study authors. Central to this is the question of how strongly households can react to the increased prices and make appropriate adjustments, for example by replacing old gas boilers with heat pumps. In a scenario with strong adaptation responses, the scientists predict that household emissions will fall by about one-third as a result of CO2 pricing.

"A steadily rising CO2 price sends important signals for long-term investment decisions," summarizes co-author Peter Haan. Nevertheless, this instrument will not be enough to make the transition to climate neutrality. To achieve climate goals, other instruments would be needed to reduce adaptation costs. "These could be, for example, regulatory commands and prohibitions or adjustments in infrastructure," Haan said.

Author: Susanne Harmsen