In Germany, major parts of the revenues from the national fuels ETS were initially redistributed by, amongst others, an increase of the commuter tax allowance, a reduction of the renewable energy support apportionment, and an increase of the housing allowance by 10%.
An early DIW study estimated, however, that these measures only partially compensated for the energy price increases and also showed that low-income households would suffer a much higher net burden of 1% of their income compared to only 0.4% of high-income households. As a response to the critique, the new coalition government announced a climate dividend, the "Klimageld", to be implemented from 2023 as the major redistribution means of the German fuels ETS. However, many details of the redistribution are still to be decided, so the starting date of January 2023 remains questionable. In addition, on the downside, in the third relief package, the German government recently announced the suspension of the national ETS carbon price increase from €30 to 35 planned for 2023, which will also reduce respective revenues for redistribution.
A comprehensive solution
Both theoretical social justice considerations and recent empirical studies indicate that an equal per capita dividend would be the preferred solution to protect low-income households from overwhelming carbon price burdens. Unpublished calculations by the renowned Mercator Research Institute on Global Commons and Climate Change show that such a dividend is very effective in compensating the regressivity of carbon pricing. At a €50carbon price, a per capita equal redistribution in Germany would lead to a net reduction of consumption expenditures of the lowest income decile by 0.75%, while the highest income decile would face a 0.5% increase. This performance is significantly better than all other tested alternatives including the ones implemented initially in Germany.
Obviously, a more targeted direct transfer differentiated by income would deliver an even better redistributional effect, but the administrative complexity and resulting extra costs of such an approach are considered unreasonable. In addition, an equal per capita dividend would be best in line with the idea of equal rights to the use of the natural environment, outlined in detail in Peter Barnes’ 2001 book "Who Owns the Sky?". More fundamentally even, the dividend approach would also comply with the criteria laid out by John Rawls in his 1971 seminal "Theory of Justice", where he defined justice as fairness. He calls for equality in terms of rights and freedom, chances and opportunities, while accepting inequalities for income and capital only within clearly defined, narrow boundaries (Difference Principle).
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