Who pays the cost of phasing out coal?

The pricing of carbon dioxide (CO2), which is now being hotly debated as an accompanying measure to phasing out coal and also as part of the climate protection law being planned, is ecologically and economically efficient and so makes sense. Without redistributional measures however, this instrument will lead to significantly higher costs for consumers depending on how it is structured. This is shown in a Policy Brief, which has now been published by the Institute of Energy Economics and the Rational Use of Energy (IER) at the University of Stuttgart. Up to 70 percent of households are affected, especially in the lower and middle-income brackets.

The scientists from the IER investigated a project funded by the BMBF to see how the transformation scenarios currently being discussed affect household incomes. The scenarios include an orderly phasing out of coal as suggested by the Commission on Growth, Structural Change and Employment (KWSB) set up by the German government, as well as alternatively introducing more stringent CO2 pricing, for example by introducing a minimum price and combining these instruments with other accompanying measures.

It was found that the CO2 pricing instrument leads to a significantly more cost-efficient transformation pathway, which makes it preferable from an economic perspective. However, for consumers this path also leads to significant extra costs in addition to the existing costs if the increased government income is not redistributed to the general populace. In principle this also applies to the new pricing of CO2 in the heating and transport sectors which is planned in the climate protection law. “The distributional impacts of CO2 pricing are huge, and are happening in a social climate in which two thirds of the population already believe that the energy revolution is expensive and affects people on low incomes the most”, said the Head of the Institute of Energy Economics and the Rational Use of Energy, Prof. Kai Hufendiek. “If you don’t want to jeopardize the acceptance of the energy revolution, the transformation process must urgently take the issue of redistribution into consideration.”

• The increase in energy prices as a result of phasing out coal or from another more ambitious CO2 pricing system when generating electricity seems more acceptable, at 0.5 - 2 ct/kWh. Though if the total costs and the rollover effects in particular are also taken into account regarding other everyday goods, the average household may have to pay up to 44 euros a month more depending on the scenario.
• Households on low incomes who already have to spend a high proportion of their disposable income on energy (electricity, heat, warm water) are particularly hard hit by the changes. Households which can still save a little bit each month, for example for old age, will also still find their finances strained as a result. Up to 50 percent of all German households will be affected in this way by the additional costs arising from the transformation of the electricity system alone, which rises to up to 70 percent if you also take the transformation of the heating and transport sectors into account.
• Without accompanying distributional policies, the necessary additional measures to combat climate change therefore pose a major risk of overwhelming household budgets. This does not only refer to people on social assistance but also includes people on average incomes. Specific accompanying measures to compensate for the costs of the transformation are therefore urgently needed in order to prevent social upheaval, and must be implemented at the same time as the measures to combat climate change.

“Our investigations show that much more thought must be given in future to how the energy revolution can be implemented cost-efficiently and how the added costs are passed on to consumers”, concluded Dr. Ulrich Fahl, Audrey Dobbins and Claudia Hofer from the project team. They said that this applies even more now that people have been given the impression that the cost of the energy revolution no longer matters because of all the measures taken and the billions of euros spent on it. “A change of direction and a rethink appear to be urgently necessary, especially as CO2 pricing is also understandably seen as a central steering instrument within the Climate Action Program 2030”, said the researchers. This applies both for the actual price which is decided upon and for the sectoral limitation, as well as for using revenues in the form of a redistribution which is either awarded or not.