Rising energy costs : bring on the climate premium

The cost of fossil fuels is rising. But in wake of carbon pricing, low-income households could benefit from climate policies.

A home captured with a thermal imaging camera

Residential building in Stuttgart, shot with a thermal imaging camera Photo: Arnulf Hettrich/imago

Ralf Ritter is always one of the first to notice when the social scene gets into trouble. At his employer – the Catholic welfare association Caritas in the Lower Saxon counties of Uelzen and Luchow-Dannenberg – it doesn’t take long for something to go awry in the state’s social fabric. Almost like a seismograph. And at the moment the rashes are huge. "The situation is threatening people’s livelihoods," says Ritter, executive director of his facility.

"I don’t remember us having this in this form before," says he, who has been doing his job for 20 years. Among other things, he and his colleagues advise people with high debts or help them fill out job center or asylum applications.

What Ritter and his Kol-le-g:innen are hearing a lot these days: The gas bill has tripled, the electricity rate is 10 percent higher, and diesel is more expensive than ever. The scale of the horror fluctuates, but many people are now at a loss, Ritter says. "A household with a normal income might still be able to cope, so you might be able to cut back on vacations or skip them altogether to make up for the extra cost," he says. "But low-income or Hartz IV households haven’t been taking vacations they could cancel for a long time now."

Corona had made life more expensive overall: Masks, Covid 19 tests, more soap and disinfectant, lots of heating needs from being at home all the time. There is no good time for an energy crisis, but now of all times is particularly bad.

Energy products will be 10 percent more expensive

According to the Federal Statistical Office, the price of energy products rose by an average of more than 10 percent in 2021, with prices exploding at the end of the year in particular. There are several reasons for this: The demand for oil has increased worldwide after the lockdown year 2020, Russia supplies little gas and the grand coalition had introduced a national emissions trading at the beginning of 2021.

Companies that put oil or gas on the market will have to pay CO2 levies for their products – just as electricity pro-du-zen-t:innen, for example, have long had to do at the European level. This is now particularly noticeable for heating and refueling.

There is one question that people who are already in financial distress are afraid of and that Ralf Ritter is also asking himself: "Is this just the beginning of the price hike?" In advance: A lot of pressures and jerks on prices in the energy market. What the interplay of factors will result in is difficult to predict. But one of them will certainly rise, and should: the CO2 price.

After all, the aim is to ensure that climate-damaging energies enter into fairer competition with the ever cheaper renewables. In other words, those who do business with oil, gas and coal must pay at least to some extent for the gigantic damage they cause. Not that the potential horrors of the climate crisis can be completely captured in numbers: Hunger, sunken islands, heat deaths, conflicts over scarce resources. From an economic point of view, however, it can be said that the real price increase is the climate price: The real price increase is the climate crisis – climate protection is cheaper.

The pricing of emitted CO2 is at the heart of climate strategies both at EU level and in Germany. In European emissions trading, the price of certificates more than doubled last year. It now stands at almost 90 euros per tonne. The traffic light government wants to decide that the price for German companies cannot fall below 60 euros. This is intended to prevent emissions trading from becoming ineffective, because investors will not be deterred by CO2 spot prices.

The German CO2 price, i.e. the price for heating and refueling, will rise in any case. Last year, the price was 25 euros per metric ton; by 2025, it will rise to 55 euros. This is what the grand coalition has determined.

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Green revolution is no fun

If the CO2 price is to remain at the core of German climate policy, the increase would have to be even steeper. Under pressure from the Federal Constitutional Court, the grand coalition also set itself higher climate targets – but did not adjust the prices. According to the coalition agreement, even the new traffic light government does not want to do this for the time being, because other effects are currently already causing high energy prices. But if these fall again, e.g. if Russia again sends more gas to Europe, this is likely to change.

Now the prospect of revolutions, however green they may be, is not much fun when the money runs out long before the end of the month. And wouldn’t that be preprogrammed with rising CO2 prices?? No, say climate economists. It can be prevented – you just have to want to do it.

The CO2 price does not simply fall from the sky, but is planned politically. So unlike the current price explosion, politicians can make targeted preparations. Austria, for example, has just passed a tax on fossil fuels as part of a major "eco-social tax reform. And a "climate bonus". There is once a year, after the climate cash fall of the state. The money, which the state took in for each ton of CO2, is distributed again to the citizens, approximately 100 to 200 euro per person. Exactly how much depends on where you live: people in rural areas should get more because it’s harder for them to switch to public transport.

In Switzerland and Canada there are similar models, albeit without the regional gradation. Also the German traffic light government has promised to develop a "social compensation mechanism", it is written in the coalition agreement. In brackets there is the word "climate money", which refers to a payout for everyone.

Ex-per-t:iners such as energy economist Claudia Kemfert of the German Institute for Economic Research also recommend such a system. "Putting a price on CO2 first has a regressive effect, meaning it disproportionately burdens low-income households," she says. In a small budget, the expenditure for energy is already proportionally more than in a large budget. A further levy would still aggravate this situation. "A climate premium that refunds the money from the levy creates social justice because it relieves the burden on low-income households in particular."

If everyone received the same amount of money back, people who fly a lot, live in and heat large houses, and drive heavy cars would pay more. Those who cause hardly any greenhouse gases might even get back more than they paid in a year. Because the former group are mostly wealthy and rich people, and the latter tend to be people with little money, this measure would also be a means of progressive redistribution.

A group of academics from the Mercator Research Institute on Global Commons and Climate Change (MCC) even concluded in 2021 that a carbon price would be the fairest form of climate protection – provided there was a per capita rebate. According to this calculation, only the richest fifth of the population would incur additional costs.

But the rule of thumb that the carbon footprint rises and falls with salary is of course not always true. Caritas managing director and consultant Ralf Ritter would like the calculations to also take into account that people with little money in particular sometimes have no opportunity at all to behave in a climate-friendly manner. "Who lives in the old, poorly renovated houses, where you have to heat especially much?", he says. "And here in Lower Saxony, we also still live in the flat countryside. Here, you have to drive everywhere, to the grocery store, to the pharmacy, to work."

Opponents of CO2 prices have turned the "uninsulated commuter" into a kind of figurehead. "A sustainable transport shift that focuses on affordable public transport and safe walking and cycling routes strengthens low-income earners in particular," says economist Kemfert. The subsidy for energy-efficient building refurbishment also benefits low-income groups, since the cost of warm rent is significantly reduced by the refurbishment. So any climate policy should ensure that no one has to be an "uninsulated commuter" anymore. At least if she wants to be successful.

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