What matters for the support of carbon taxes? Lessons from Germany

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Many countries worldwide struggle to reach their national climate targets. For instance, Germany committed itself to reduce greenhouse gas emissions by 40% by 2020 compared to 1990. It seems that it could only reach this goal because of the sharp decline in emissions triggered by the Covid-19 pandemic.

Yet, economic theory teaches us that there is a simple instrument to reduce emissions efficiently: carbon taxation. Even though the economic arguments for carbon taxes are convincing, many countries hesitate to implement them. One barrier to their introduction is public opposition, as vividly demonstrated by the Yellow Vest movement in France.

Stephan Sommer has been working as a researcher at RWI – Leibniz Institute for Economic Research in the competence area Environment and Resources since December 2013. He completed his studies in Economics at the Ruhr-University Bochum and the Colegio Universitario de Estudios Financieros in Madrid. He received his PhD from the Ruhr-University Bochum in October 2018. In the summer term 2020, Stephan was acting professor for economics at the Bochum University of Applied Sciences. His research interests include behavioral economics, applied econometrics and environmental, resource and energy economics.

Linus Mattauch is a lecturer at the Environmental Change Institute of the Faculty of Geography and the Environment. He is also Deputy Director of the Economics of Sustainability Programme at the Institute for New Economic Thinking at the Oxford Martin School. Linus’ research focusses on evaluating policy options for mitigating climate change and addressing wealth inequality. He also works on theories of economic growth and low-carbon transport. Linus previously held a postdoctoral grant of the German Academic Exchange Service (2016-2018) and worked at the Mercator Research Institute on Global Commons and Climate Change and the Technical University of Berlin where he completed his PhD in 2015. 

Michael Pahle is head of the working group Climate & Energy Policy (CAEP) at the Potsdam-Institute for Climate Impact Research (PIK). Michael’s work focuses on carbon pricing, in particular the EU’s Emission Trading System (EU-ETS), renewable electricity policy design and integration, and more recently public support of carbon pricing. He has provided technical support in the design of carbon dioxide emissions trading programs in the EU and Germany, as well as the German coal phase out. He is lead coordinator of the work on EU climate policy and policy instruments in Ariadne, Germany’s flagship social science research project on climate policy and the energy transition. He holds a PhD in economics from Technical University Berlin. 

On January 1, 2021, Germany introduced a carbon price for the building and transport sector. Starting at a rate of 25 Euro per ton, it will gradually increase to at least 55 Euro by 2025. Most of the revenues are used for green investments. Whether this policy can be preserved – or whether carbon prices can even be raised – crucially depends on public support, which in turn hinges on fairness concerns. 

So, what can policymakers do to increase public support and facilitate the introduction of carbon taxation? Our new study aims to provide some answers that encompass fairness, individual financial burden, and revenue use. We conducted a large-scale survey among 6,500 household heads in Germany and find several key insights that could guide policymakers to design a carbon tax, which they might like. We draw the following five lessons: 

1. Only relatively low carbon prices of less than 50 Euros per ton are currently supported by a majority.

Our study confirms that support hinges on the individual economic reality as carbon prices are mostly opposed by citizens with a high financial burden, especially if the carbon price is high. In turn, carbon prices are supported by the well-educated, more affluent, urban citizens who trust the government and have pro-environmental attitudes. 

Overall, only low carbon prices are currently approved by a majority in Germany (see Figure). A sizeable share of the population supports fairly high carbon prices. However, according to most climate experts, still higher prices are required to induce citizens to switch their heating source or purchase an electric vehicle. Altering the design of the carbon price is therefore crucial to make it acceptable to the majority. 

Figure: Percentage of respondents who support a carbon price conditional on its amount.
The dependent variable is a binary indicator that is unity if the respondents are willing to support a carbon. Thus, the height of the bars indicates the additional support in percentage points for a price of 10, 50 or 100 Euro. The whiskers represent the 95% confidence interval.

2. “Green Spending” receives the largest support for revenue use, but it might imply “preaching to the converted” 

Making green investments, such as promoting renewable energies and climate-friendly transport options, are supported by three quarters of the respondents. They are particularly popular among respondents who are more affluent, have pro-environmental attitudes, trust in the government, and are on the political left – basically the group who is rather supportive of a carbon price in the first place. Accordingly, looking just at what people want to use revenues for, could put policy design on the wrong track. Instead, it is important to consider which use of revenues could actually increase support most, implying to use it strategically to that end. A key option for that is direct redistribution to citizens. 

3. If revenues are redistributed to the citizens, a lump-sum payment is the preferred option. 

Without further action, carbon taxes have regressive effects as households with low incomes tend to spend a relatively larger amount on their energy bills than more affluent households. To counteract the regressive effects of carbon taxes, their revenues can be directly redistributed to the citizens. When restricted to direct redistribution, the majority of Germans prefers an equal lump-sum payment to all citizens (as, for instance, in Switzerland) over channeling revenues to the more vulnerable households. The negative effect of higher carbon prices is smaller for respondents who are in favor of this policy. This result could become more important with increasingly ambitious climate policies: in the future, both the distributional impacts of carbon pricing as well as the amount of revenues will increase.

4. Besides economic motives, the preferences are determined by general fairness conceptions.

In our study, half of the respondents received detailed information about the fairness consequences of different redistribution policies. We find that the genuine fairness views are fairly stable and vaguely associated with their views about specific policy instruments. Hence, fairness views definitively matter to understand public support.

5. If citizens can choose the redistribution scheme, the support of a carbon price increases. 

The support for a carbon price would increase if it was implemented according to the respondent’s preference, especially when the carbon price is high. Consequently, even high carbon prices of 100 Euro per ton would be supported by the majority. This finding indicates that redistribution becomes more important as the carbon price raises. It suggests policymakers could trial a scheme by which citizen’s themselves could choose how their tax proceeds are to be used. 

Summary

Our findings suggest that with more ambitious climate targets and rising tax rates, direct redistribution becomes more important. It can ensure majority support of a carbon tax scheme. Low-income households would benefit over proportionately from lump-sum transfers. Green spending, in turn, is supported particularly by citizens who are in favor of a carbon tax in the first place, while it is rejected by citizens who would particularly suffer from high carbon taxes. Green spending might therefore run the risk of “preaching to the converted”, rather than building societal support with people who oppose climate action.

Specifically, our results are relevant for the further development of carbon taxes, as in the long run, high carbon prices will only be enforceable if the distribution of costs is considered fair. From a policy perspective, coupling a carbon tax with a lump-sum payment could make it work for citizens. In addition, governments could implement an opt-out scheme to not pay out the lump-sum and instead invest it into green energy or transport infrastructure if an individual preferred green spending over lump-sum payments. With increased climate targets in the EU and carbon prices being necessary for efficient decarbonization in Germany, but also elsewhere, we will find out much more this decade which strategies will work to make carbon prices acceptable to citizens. 

The full paper can be found here: https://en.rwi-essen.de/publikationen/ruhr-economic-papers/1112/