IEA (2021), Recommendations of the Global Commission on People-Centred Clean Energy Transitions, IEA, Paris https://www.iea.org/reports/recommendations-of-the-global-commission-on-people-centred-clean-energy-transitions, License: CC BY 4.0
All policies, particularly pricing and fiscal instruments, have distributional impacts and require careful design to prevent negative effects or perceived unfairness.
The perceived fairness and public acceptability of carbon pricing is likely to be higher when corresponding tax revenues are channelled toward mitigating the net impact on household pocketbooks.
- Switzerland recycles revenues from its carbon tax by reimbursing two-thirds of the proceeds to all inhabitants as reductions in health insurance charges, which increases distributional equity and helps foster support for the policy. Nonetheless, a recent effort to increase the carbon price was narrowly rejected in a June 2021 referendum.
- Canada returns around 90% of carbon pricing proceeds collected in some provinces back to households in the form of a rebate, offsetting the gross impact on household finances.
- The European Commission has proposed a Social Climate Fund to help reduce the financial impacts on vulnerable households and transport users from the planned emissions trading system on the transport and buildings sectors by investing in energy efficiency and, where relevant, direct income support.
Reform of inefficient fossil fuel subsidies can be undertaken in ways that protect vulnerable social groups while removing perverse incentives for wasteful consumption of polluting fuels.
- As part of fossil fuel subsidy reform in 2016, the Indonesian government developed a new, better-targeted LPG subsidy scheme, using a smart-card system, which merged the energy subsidy with the social protection system to better target subsidies for poor households.
- Effective communication was instrumental to success in Peru’s implementation of its Energy Fund for Social Inclusion, including targeting the most vulnerable population segments.
- Oman is combining the phase-out of subsidies with a new national support system to help low-income consumers.
Alongside costs, it is also important to ensure that benefits and incentives are fairly distributed. For example, the OECD has pointed out that home renters will not benefit from subsidies for improving energy efficiency available to homeowners.
Transparent and straightforward communication can aid acceptance and build trust in policies. For example, as part of Indonesia’s LPG subsidy reform, the government developed a strategic communication campaign, emphasising that the reforms were not about eliminating every form of support but about switching subsidies from products to households. And before making any adjustments to its carbon pricing mechanism, the government of Sweden identifies groups that will be most impacted and targets communication of the policy changes to their concerns.
Several projects have also demonstrated success in aligning access goals with local opportunities for remote and marginalised groups. In Guyana, the Hinterland Renewable Energy Project, part of the Low Carbon Development Strategy, supports the installation of solar home systems for rural households without access to the national grid, and includes training programmes targeted at Indigenous communities for installation and maintenance of the systems. Similarly in Brazil, RevoluSolar, a community-based organisation, installs solar panels in favelas and trains residents as electricians or entrepreneurs.
Swiss carbon tax
Switzerland introduced a CO2 tax on fossil fuels used in stationary sources in 2008. The levy covers around 40% of the country’s greenhouse gas emissions, primarily in the heating and process fuel sectors (fossil fuel for electricity generation – mainly small CHP and district heating – amounting to 1.2% of total generation). The levy is currently set at CHF 96 (EUR 89)/tonne of CO2 and from 2022, will be CHF 120/tonne. Two-thirds of Switzerland’s carbon tax revenues are returned to households and businesses through reductions in health insurance charges and social security payments. This redistributive policy design reduces the burden of the policy cost on households. In 2018, the Swiss Federal Office for the Environment (FOEN) estimated that carbon tax revenues were CHF 1.2 billion (EUR 1.1 billion), and each Swiss resident received CHF 88.8 (EUR 82.5) via the redistribution policy. Because carbon taxation faces questions of political feasibility, the double dividend benefit from carbon tax revenue redistribution also fosters support for the policy. Nonetheless, recent legislation to increase the carbon price on stationary sources and indirectly (through higher offset obligations) on transport fuels was narrowly rejected in a June 2021 referendum, highlighting the ongoing challenges over public acceptance of higher fuel prices.
Canada carbon pricing policy
The Pan-Canadian Approach to Pricing Carbon Pollution, released in October 2016, set a ‘federal benchmark’ (or price floor) requiring all provinces and territories to implement carbon pricing systems with a certain level of stringency, while also ensuring the provinces and territories have the flexibility to design their own policies and programmes. A ‘federal backstop’ carbon pollution pricing system applies in any jurisdiction that requested it or that did not implement its own system that meets the federal benchmark’s stringency requirements. The Canadian government does not keep any of the direct proceeds from carbon pollution pricing; direct proceeds from the federal carbon pollution pricing system are returned to the province or territory of origin. Provincial and territorial governments that have voluntarily adopted the federal system receive these proceeds directly from the federal government and have the flexibility to decide on how to use them. For provinces that do not meet the federal stringency requirements, the federal government returns the bulk of direct proceeds (approximately 90%) from the carbon charge directly to individuals and families in these jurisdictions in the form of tax-free Climate Action Incentive payments when they file personal income taxes. A family of four received CAD 600 in Ontario for the 2020 tax year, CAD 720 in Manitoba, CAD 1 000 in Saskatchewan and CAD 981 in Alberta, while families in rural and small communities receive an extra 10%.
The European Commission’s Social Climate Fund
The proposed EU regulation creating a Social Climate Fund is meant to help EU citizens meet the social and economic costs of the climate and energy transitions. It was adopted by the Commission on 14 July 2021 as part of the 'fit for 55' legislative package. Under the 'fit for 55' package, the Commission proposed extending the Emissions Trading Directive to the buildings and road transport sectors, where the pace of decarbonisation has been insufficient to meet EU decarbonisation objectives. The Social Climate Fund would help address any social impacts that arise from the new system, with the twin objectives of supporting vulnerable households and micro-enterprises adopt clean mobility solutions and renovate their homes while also potentially granting them temporary direct income support . Vulnerable households, micro-enterprises and transport users are likely to be disproportionally affected by the increase in the price for fossil fuels. Low-income households tend to spend a larger part of their incomes on energy and transport and in some regions lack access to alternative, affordable mobility and transport solutions. The funding of the future Social Climate Fund will come from a dedicated share (25%) of revenues from the auctioning of emissions allowances under the new system. The Commission's current proposal would allocate a total of EUR 72.2 billion (in current prices) to the Fund over the 2025-2032 period, which would be complemented by an equal contribution from Member States.
LPG subsidy reform in Indonesia
The Indonesian government started to design a new LPG subsidy scheme in 2016, to target the subsidy specifically for poor households, small businesses, fishers and farmers. To achieve this, the Parliament proposed a solution to use the unified poverty database of Indonesia for social protection programmes, to better identify subsidy targets; such a methodology was previously implemented for electricity subsidy reforms. The main objective was to provide subsidies to only 40% of the poorest households and small businesses owned and run by these households. In doing so, the subsidy’s beneficiaries could fall from 57 million people to 26 million poor households, 2.3 million small businesses and a number of small fishers and farmers. The president recommended that these beneficiaries receive a 3 kilogram LPG subscription card linked to the banking system, where each household receives three canisters per month and small businesses nine canisters per month. In 2017, the Office of the Cabinet Secretariat mandated that the subsidy programme be integrated with the social assistance programme, thus creating a unified welfare card system that merges energy subsidies and social protections.
Peru’s Social Inclusion Fund
The Peruvian government created the Social Inclusion Energy Fund (FISE) in 2012 to bring clean energy to the most vulnerable segments of the population and help tackle energy poverty in the country. The programmes financed by this fund consisted of granting subsidies on LPG prices and electricity tariffs to low-income households, promoting car conversions to LPG or natural gas, and installing solar PVs in isolated homes that are not physically connected to the grid. By 2019, around 2.9 million households benefitted from electricity price subsidies, and 177 609 solar panels were installed. Most panels were installed in homes, but also in health and education buildings, powering basic services in vulnerable communities. Peru’s outreach and communication efforts as part of implementation were instrumental to outcomes. The FISE programme included a website as well as the use of text messaging and other “fast communication” methods to facilitate contact with eligible groups. Use of digital vouchers and cellular banking enabled real-time transactions, eliminating delays and reducing administrative costs.
Oman’s energy subsidy reforms
In January 2021, Oman started implementing a phase out of its electricity and water subsidies. Prior to the reform, electricity and water subsidies were available to all consumers regardless of their level of income, including non-residential categories such as industry, tourism, agriculture and governmental entities. The plan is to gradually increase utility tariffs for all consumer categories until subsidies are fully phased out in 2025. In parallel, a National Support System was established to mitigate the impact of the reform on lower income households, based on a new electricity tariff structure. The support programme, based on a 2019 census, will take into account the monthly income of households as well as the number of household members.
Senegal’s VAT exemption for renewables equipment
In July 2020, the Ministry of Petroleum and Energy of Senegal enacted a bill exempting the production of electricity from solar and wind as well as biogas from the Value Added Tax (VAT). Prior to the exemption bill, the VAT was charged at the full 18% rate for off-grid renewable energy equipment and products. The list of 22 VAT-exempted appliances includes solar panels, inverters, solar thermal collectors, batteries, solar lamp kits, solar water heaters kits, wind towers, blades, rotors, nacelles as well as biogas equipment. Through the new bill, the government aims to accelerate rural electrification toward its universal energy access goal by 2025.
Sweden’s carbon tax
Sweden introduced a carbon tax in 1991. At the time, the price was SEK 250 (EUR 24) per tonne, and it has since increased to SEK 1 200 (EUR 114) in 2021 – the highest CO2 tax rate in the world. Before making any adjustments to its carbon pricing mechanism, the government in Sweden identifies groups that will be most impacted, and targets communication of the policy changes to their concerns. The gradual increase of the tax level also means that households and businesses are given enough time to adapt, which has improved the political feasibility of the increases and promoted trust in the carbon price. Any increase has also typically been combined with general tax relief in other areas for households and firms to avoid increases in the overall level of taxation, address undesirable distributional consequences and stimulate job growth.