Carbon pricing: Economists question lump-sum payouts to households

While many economists have long advocated introducing a ‘climate dividend’ to avoid social tensions caused by carbon pricing, a group around Nobel-prize winner Joseph Stiglitz questioned this approach in a paper released on Monday (17 June) in Nature Climate Change.

To avoid over-constrictive regulation in climate policy, most economists favour focusing on carbon pricing. If an appropriate price is set for CO2 emissions, the market can find the most efficient solutions to reduce CO2 emissions, they argue.

As the burden of carbon pricing, relative to income, is highest for poorer households, economists have long argued that the revenues from such schemes should be reimbursed to all citizens on a per capita basis, through a so-called ‘climate dividend’.

This would be equally distributed to all households but would provide particular relief to people with lower incomes, due to their generally lower CO2 emissions.

However, there are growing doubts among scientists whether this approach is effective.

“Lump-sum recycling of carbon revenues has turned out far from a silver bullet for making carbon pricing appealing to the public,” Nobel Prize winner Joseph Stiglitz and other researchers wrote in a comment published on Monday in the Nature Climate Change journal.

“In many countries, people doubt the effectiveness and fairness of carbon pricing, especially when its revenues are distributed back to consumers as a uniform grant,” the researchers wrote.

“Why, some ask, should Bill Gates, Elon Musk, or Jeff Bezos get the same size check as a poor person,” they added.

A survey in France, Germany, and Spain showed that using the collected funds to invest in climate action is much more popular than a per capita refund.

The results are “very much in line” with what similar surveys have shown, lead author Franziska Funke, researcher at the Potsdam Institute for Climate Impact Research (PIK), told Euractiv.

Respondents would prefer that revenue from carbon pricing be used for investments, rather than being distributed to everyone.

“Support for carbon pricing is highest when revenues are channeled back in the form of green investments,” she said.

High interest rates complicate the transition

Funke explained her different approach by referencing the increased focus on enabling consumers to transition to climate-friendly alternatives, such as heat pumps or electric cars.

The large initial investments those alternatives require are a heavy burden for poorer households, especially in times of high interest rates, making it almost impossible for them to make the transition.

While investments in electric cars and heat pumps often pay off in the long term due to lower operating costs, “the high upfront costs can seem prohibitive for people without sufficient savings or access to affordable lending,” the paper said.

The researchers are therefore “urgently” calling for discounted loans for low-income households which should enable them to transition to climate-friendly alternatives – and thus escape rising carbon prices.

The topic is also particularly relevant due to the introduction from 2027 of a new European emissions trading system (ETS2) for heating and road transport, whose prices could be significantly higher than the €45 per tonne of CO2 aimed for by policy-makers.

Targeting compensation to the realities of life

However, there are other approaches as to how the additional revenues from carbon pricing could be used.

Last year, German economists Rüdiger Bachmann and Christian Bayer argued in favour of distributing the revenue from carbon pricing back to citizens, but making this compensation more targeted.

According to the two German researchers, a per-capita repayment would shift the burden to households “in carbon-intensive living situations, in poorly insulated homes and to commuters”.

“Carbon consumption in the heating sector in particular is relatively independent of income and spreads widely,” they found, calling for greater consideration of existing living conditions.

For example, people living in non-renovated houses could receive a higher repayment than those in well-renovated flats.

[Edited by Donagh Cagney/Zoran Radosavljevic]

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