Fairness, effectiveness, and needs satisfaction: new options for designing climate policies

Milena Büchs, Diana Ivanova and Sylke V. Schnepf

Abstract

Financial compensations are often proposed to address regressive distributional impacts of carbon taxes. While financial compensations have shown to benefit vulnerable groups distributionally, little is known about their impacts on emission reduction or needs satisfaction. A potential problem with cash compensations is that if households spend this money back into the economy while no additional decarbonisation policies are implemented, emission reductions may not speed up much compared to current rates of decarbonisation. In this letter, we compare the emission savings and impacts on fuel and transport poverty of two compensation options for carbon taxes in 27 European countries. The first option are equal per capita rebates for home energy and motor fuel taxes. The second option is the provision of universal green vouchers for renewable electricity and public transport combined with additional investments in green infrastructures to meet increased demand for such green consumption. Results show that the first option of tax rebates without additional low carbon investments only supports small emission reductions. In contrast, universal green vouchers with expanded green infrastructures would reduce home energy emissions by 92.3 MtCO2e or 13.4%, and motor fuel emissions by 177.5 MtCO2e or 23.8%. If green vouchers and infrastructure were provided without a prior tax, emission savings would be slightly lower compared to the “tax and voucher” scheme, but 4.1% and 2.2% of households would be lifted out of fuel and transport poverty respectively. In contrast, taxes with rebates would increase fuel and transport poverty by 4.1% and 1.8%. These findings demonstrate that policies that aim to compensate for unfair distributional impacts of climate policies need to be combined with additional interventions to expand the provision of green goods and services, and minimise fuel and transport poverty so that social and environmental objectives can be met in conjunction.

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