The big question: Steer or promote?

Political measures to reduce energy consumption and CO2 emissions have a variety of effects on the economy and households. A study carried out in the National Research Program "Control of Energy Consumption" (NRP 71) provides for the first time detailed impact assessments of the energy policy strategies "steering" and "promotion" with regard to efficiency and social balance.

In order to pursue the consumption targets of the Energy Strategy 2050 and the CO2 legislation, policymakers have two basic strategies at their disposal: consumption control by means of taxation of energy and CO2 or support measures with market mechanisms (e.g. taxes and subsidies) or with mandatory requirements (e.g. efficiency regulations for electrical appliances or exhaust emission limits for passenger cars).

"The question of the appropriate choice and design of policy measures to reduce energy and CO2 emissions must take into account not only the total costs but also, to a significant extent, how the gains and burdens are distributed among different socio-economic groups," says Sebastian Rausch. The professor of energy economics at the Center for Economic Research at ETH Zurich conducted the study as part of NRP 71.

Hidden costs of promotion

The study concludes that, in macroeconomic terms, steering is significantly more efficient and up to five times less costly than subsidies. However, households perceive this differently, as energy prices increase more with steering measures and the redistribution of revenues back to households and businesses is hidden. "With subsidy measures, energy prices rise only slightly. But this only suggests seemingly lower costs," Rausch says. "Subsidy measures reduce energy consumption only where they are subsidized, and some things are subsidized that are realized anyway. Steering, on the other hand, acts everywhere and on every single energy-related decision made by households and businesses. Steering acting across the board therefore leads to significantly lower total costs than selective promotion. The higher total costs of the promotion strategy are hidden. Ultimately, however, households and companies have to pay for these additional costs," Rausch explains.

Treat everyone equally, or allow winners and losers?

The study shows that with both steering and subsidies, individual households are affected differently because of their respective energy use and income - there are "winners" and "losers" in both strategies. However, the strategies differ in three key ways:

1. steering leads to a significantly wider dispersion of effects on disposable income between households due to larger energy price changes.

2. most households are better off with steering than with promotion.

3. with the promotion strategy, almost all households lose, while with steering, one third of households are actually better off.

Who gains or loses from steering depends largely on the redistribution mechanism of the steering tax as well as on energy expenditures and household income: On average, lower-income households are protected from rising energy costs by a per capita redistribution of tax revenues, homeowners are worse off compared to renters, and households in rural areas lose out to households in cities and agglomerations.

Insights into households

The perspective of households is particularly significant because, as workers and consumers of energy and goods, they are affected by energy policy measures in several ways.

Rausch states, "The present findings help to increase the social acceptance of such market interventions. However, the aim of the study is not to evaluate specific policy measures, but rather to highlight the fundamental differences between promotion- and steering-based energy and climate policies."

A detailed description of the study and the results can be found in the working paper > Extended Abstract and Summary ProSTEP. (in English)

Source: SNF