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Distributional impacts of CO2 pricing - focus on the buildings sector

Panel: 7. Policies and programmes for better buildings

This is a peer-reviewed paper.

Authors:
Katja Schumacher, Öko-Institut, Institute for Applied Ecology, Germany
Sibylle Braungardt, Öko-Institut
Johanna Cludius, Öko-Institut
Benjamin Köhler, Öko-Institut
Konstantin Kreye, Öko-Institut

Abstract

The building sector is responsible for 16 % of GHG emissions in Germany and its contribution to meeting Germany’s climate targets is correspondingly high. Effective climate protection in the building sector can only be achieved with a broad mix of instruments. One important instrument in this mix is CO2 pricing of fossil fuels. In Germany, a CO2 price for the building and transport sector was introduced at the beginning of 2021. This paper analyzes the social impacts of CO2 pricing in Germany and looks into alternative models for revenue recycling. We focus in particular on redistributing revenues by reducing the renewable energy surcharge and thus household electricity prices. Additionally, we consider how the impacts change when efficiency investments are taken in response to the pricing scheme.

Our analysis shows that CO2 pricing in Germany in combination with revenue use for reducing electricity costs has clear positive distributional effects at the level of households. Limiting the pass-through of CO2 cost from landlords to tenants both reduces the burden on tenants and increases incentives for landlords to invest in energy-efficient refurbishments. For households in the first three income deciles, reductions in electricity cost outweigh the CO2 costs incurred. Although high-income households also benefit from an abolition of the renewable electricity surcharge, the costs incurred from CO2 pricing cannot be completely offset. We find, however, adjustment actions such as investing in more efficient, zero-carbon energy solutions results in net reductions also for these households.

Besides limiting cost pass-through to tenants, we conclude that a carefully chosen approach for revenue recycling is important to protect vulnerable households. Taking into account the practical implementation as well as transaction costs, this results in a favourable assessment for electricity price reduction as a redistribution mechanism compared to a lump-sum rebate of the same revenue amount. These findings can inform the ongoing discussions of introducing an EU-wide carbon pricing mechanism for buildings and transport as proposed by the European Commission.

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