Raising revenues through carbon pricing can help the poor to pay for their energy bills

Florens Flues and Kurt Van Dender, OECD Centre for Tax Policy and Administration

A widely heard criticism of carbon pricing is that it will simply hurt the poor. But just like other similar schemes with environmental aims, such as water charging, the opposite is true. It all depends on having the right policies in place.

One very effective policy for reducing air pollution and mitigating risks from climate change, such as storms, floods and sea level rise, is to raise taxes on domestic energy use. In fact, by taking just one-third of the revenues raised through such taxes to fund cash transfers, policy makers would make it easier for households to pay their energy bills, not harder.

The message that higher energy prices are indeed quite compatible with social policy objectives is the main finding from a new OECD working paper, “The impact of energy taxes on the affordability of domestic energy”.

Energy affordability is the ability of households to pay for the necessary levels of electricity and heating. While the concept of being able to pay of one’s bills has intuitive appeal, measuring affordability is challenging in practice.

The paper uses household level data covering 20, mainly European, OECD countries to analyse energy affordability at current energy prices and after a hypothetical, environmentally-related energy tax reform. It compares three indicators, which are based on expenditure shares, relative incomes, and a combination of both for the third (and strictest) indicator. The strict indicator says that households face energy affordability risk if they spend more than 10% of their disposable income on electricity and heating, and their income is less than 60% of the median income.

Energy affordability concerns are manifest at current prices. According to our strict indicator, less than 3% of Swiss households face energy affordability risk, while more than 20% in Hungary do; the median share is around 8%. Low energy affordability also results in utilities cutting off supply to households. More than 100 000 households see their electricity supply cut each year in France, Germany and Spain. In the United Kingdom more than 1.5 million households cut off their electricity supply because they cannot afford to top up pre-pay meters.

In many countries domestic energy prices are rising, partly as a result of charges that finance the expansion of renewable energies. In practice, incentives for renewables often burden poor households, particularly because the poor tend to spend a higher share of their income on electricity and heating than the rich.

Unfortunately, some politicians have used this relationship to argue against stronger emission cuts. It is a blinkered view. Using taxes to make polluters pay for their emissions actually raises revenues that can be used to support households. This has been done to good social effect in Switzerland, for example.

The simulated energy tax reform aligns prices with environmental objectives, and increases energy prices by 11.4% on average for electricity, 15.8% for natural gas, and 5.5% for heating oil. Redistributing a third of the additional revenues resulting from this reform to poor households, by means of an income-tested cash transfer, is sufficient to improve energy affordability according to the three indicators. Under the strict indicator combining expenditure shares and relative incomes , energy affordability risk would decline by more than 10% on average across all countries considered. Uniform transfers are less effective at combatting affordability problems, although affordability would still improve according to the strict indicator.

Mitigating the adverse impacts of higher energy taxes, which are needed to cut harmful carbon emissions and air pollution, on energy affordability, requires no more than one-third of the revenues raised by the higher taxes. The remaining revenue can be used to make the tax mix for other social objectives, or for more inclusive growth.

References and further reading

Flues, F. and A. Thomas  (2015), “The distributional effects of energy taxes”, OECD Taxation Working Papers, No. 23, OECD Publishing, Paris, http://dx.doi.org/10.1787/5js1qwkqqrbv-en.

Flues, Florens, and Kurt van Dender (2017), “The impact of energy taxes on the affordability of domestic energy”, OECD Taxation Working Papers, No. 30, OECD Publishing, Paris, http://dx.doi.org/10.1787/08705547-en.

Kurt, Van Dender (11 October 2016), “Resistance is futile. Higher carbon process needed to guide the transition to carbon neutral growth”, OECD Insights blog, http://oecdinsights.org/2016/10/11/higher-carbon-prices-for-carbon-neutral-growth.

OECD (2016), Effective Carbon Rates: Pricing CO2 through Taxes and Emissions Trading Systems, OECD Publishing, http://dx.doi.org/10.1787/9789264260115-en.

OECD (2015), Taxing Energy Use 2015: OECD and Selected Partner Economies, OECD Publishing, Paris, http://dx.doi.org/10.1787/9789264232334-en.

OECD work on taxaxation and the environment: www.oecd.org/tax/tax-policy/tax-and-environment.htm 

Sustainable buildings: Does the OECD practice what it preaches?

This is what it won’t look like by the end of the year

Today we’re publishing the last in a series of three articles by Liisa-Maija Harju, Environmental Coordinator in the OECD Operations Service on the OECD’s environmental performance.

Did you know that the Eiffel Tour is going green? The planned €25 million investments will improve the landmark’s energy performance by 30%. The Eiffel Tour will start to generate its own electricity and hot water by the end of 2013. Solar panels and small, vertical wind and hydraulically-powered turbines will be installed 57 metres above the ground. Ninety-five per cent of the new lighting will be of LED-type that has a longer lifespan and consumes less energy than conventional eco light-bulbs.

Small, individual investments like this are needed because the building sector contributes up to 30% to annual global greenhouse gas (GHG) emissions and consumes up to 40% of all world energy, according to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC). Not to mention that the big clock is ticking: the World Meteorological Organization announced that the amount of GHGs in the atmosphere reached a new record high in 2011.

Fortunately the building sector offers the largest potential for climate change mitigation at low-cost in all world regions, and sustainable building practices are becoming popular. In these types of buildings natural resources like energy and water are used efficiently; emissions, pollution and waste production is minimized; and occupants’ health and employees’ productivity are improved.

To tackle the climate challenge, private sector investments in buildings, transport and energy infrastructure will need to be shifted toward low-carbon options. Choices made today about the types and location of critical infrastructure will lock-in costly future emissions and the vulnerability of our economies to a changing climate. The OECD has developed a Green Investment Policy Framework which identifies how governments can improve the conditions to shift and scale-up private investment towards greener infrastructure.

The International Energy Agency’s Sustainable Buildings Centre (IEA-SBC) agrees, and recommends a holistic approach for lowering buildings’ energy consumption. Aiming for net-zero energy consumption, improving the energy efficiency of existing buildings, applying for building energy labels or certificates, as well as improving energy performance of building components and systems are some of the most cost-efficient ways to save energy in buildings. Appliances and equipment used within buildings should also be selected according to these guidelines. The Eiffel Tour is definitely on the right track!

But building occupants’ consumption habits can also have a significant impact. The results of an OECD survey on “Greening Household Behaviour” show that government policies and mixes of instruments can encourage the best changes towards occupants’ sustainable consumption habits. Regulations can incentivise building owners and services providers to offer an infrastructure and services that support positive behavioural changes. The presence and quality of collection services for recyclables, for example, is found to increase recycling participation and intensity. Providing the right economic incentive has also proved to be useful: price-based incentives encourage energy and water savings.

We at the OECD’s Operations Service have listened to these recommendations. One of the main goals we have set for ourselves within the Organisation’s internal greening strategy is to obtain the French High Environmental Quality (La Haute Qualité Environnementale® Exploitation, HQE®E)- environmental certification for the five major buildings in which we operate in France.

Our buildings have indeed a significant impact on total GHG emissions of OECD operations: in 2011 the overall GHG emissions of our operations were 8,535 tCO2e, an 8% decrease from 2010. Due to the nature of our work, travel on missions is the main contributor to this GHG footprint (64%), followed by buildings (20%) and commuting (16%).

The HQE® is the most frequently applied building certification scheme in France. It is a voluntary approach aiming to limit the short and long-term environmental impact of a building’s operation and maintenance, while guaranteeing healthy and comfortable living and working conditions for the occupants. The certificate’s 14 indicators are used to measure and manage buildings’ quality in four areas: construction, management, comfort, and as well as health. In addition to energy and emissions the indicators are used to measure topics like green procurement and waste management.

We are approaching our HQE®E-certification goal: two of the five buildings are now HQE®E – certified, and we are working towards certifying the OECD Conference Centre and Château de la Muette as well as one more building in which our employees work. These successes were made possible thanks to the support of the Secretary-General of the OECD, the know-how of all operations service teams involved, and the engagement of our employees.

While our strategy has so far proven to be successful, it should be remembered that HQE®E and other buildings’ environmental certificates available on the market only encourage the buildings’ owners and service providers to improve buildings’ environmental quality and performance. The certificates do not yet allow for the measurement of resilience. How do buildings react to impacts or risks, such as extreme weather events, caused by the environment?

Useful links

 OECD at the UN Climate Change Conference in Doha (COP 18)

OECD Environment Working Paper: Testing the effect of default on the thermostat setting of OECD

French HQE Association

Subsidising Pollution?

How can we reduce fossil fuel use and make the switch to clean energy?  Debates on fossil fuel dependence and its consequences for the environment have reached a crescendo as COP15 nears its deadline.  But did you know that governments still subsidize the use of fossil fuels?  Helen Mountford of the OECD Environment Directorate, Peter Wooders of the IISD and Dr. Fatih Birol of the IEA explain the importance of dealing with these contradictory policies.

Useful links:

OECD and COP15
The IISD Blog

Energy … You’d think we’d be savin’ it up.

To change the world’s energy model is the most significant challenge facing humanity.
– Spanish Prime Minister Jose Luis Rodriguez Zapatero

What does our energy use look like for now? How much energy does a Kenyan use compared to an Australian?   How much does it take to produce goods and services in China compared to India?  How much pollution is all this causing?