Carbon pricing in Germany's road transport and housing sector: Options for reimbursing carbon revenues. (October 2021)

• Record Type: Journal Article
• Authors: Frondel, Manuel; Schubert, Stefanie A.
• Is Part Of: Energy policy. Volume 157(2021)
• Publication Date: 2021-10
• Subjects: Electricity tax -- Housing benefits -- Distributional effects; D12 -- Q21; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2021.112471
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: In 2021, Germany launched a national emissions trading system (ETS) in its road transport and housing sectors that increases the cost burden of consumers of fossil fuels, the major source of carbon dioxide (CO2) emissions. A promising approach to secure public acceptance for such a carbon pricing would be to entirely reallocate the resulting "carbon" revenues to consumers. This article discusses three alternatives that were discussed in the political arena prior to the introduction of the national carbon pricing: a) a per-capita reallocation to private households, b) the reduction of electricity prices by, e.g., decreasing the electricity tax, as well as c) targeted financial aid for vulnerable consumers, such as increasing housing benefits. To estimate both the revenues originating from carbon pricing and the resulting emission savings, we employ a partial equilibrium approach that is based on price elasticity estimates on individual fossil fuel consumption from the empirical literature. Most effective with respect to alleviating the burden of poor households would be increasing housing benefits. While this measure would not require large monetary resources, we argue that the remaining revenues should be preferably employed to reduce Germany's electricity tax, which becomes more and more obsolete given the steadily increasing amount of electricity generated by renewable energy technologies. Highlights: To secure acceptance for a carbon pricing, "carbon" revenues should be reallocated to consumers. This article discusses three alternatives: a) a per-capita reallocation to private households. b) the reduction of electricity prices by, e.g., decreasing the electricity tax. c) targeted financial aid for vulnerable consumers, such as increasing housing benefits. Preferably, Germany's electricity tax should be reduced, as it becomes more and more obsolete.