Can Polluter Pays policies in the buildings and transport sectors be progressive?

EXECUTIVE SUMMARY:

Two politically sensitive reforms

The proposed Energy Taxation Directive (ETD) reform and extension of the Emissions Trading Scheme to buildings and road transport (ETS2) are two of the most politically sensitive elements of the Fit for 55 package.

On one hand, the proposals would significantly expand the application of the polluter pays principle across the EU, eliminating swathes of fossil fuel subsidies and capping emissions in two laggard sectors in the energy transition. But on the other hand, given that energy costs constitute a higher share of expenditure of lower-income households, who are less able to change consumption behaviour in response to higher prices, many stakeholders are concerned that the proposals risk entrenching inequality.

New evidence of progressive distributional impacts

We provide new evidence from a microsimulation model developed by the Basque Centre for Climate Change (BC3) with IEEP and five other partners in the Think Sustainable Europe (TSE) network to assess the direct, overnight distributional impacts of both measures on households. We show that if carefully designed – including well-directed revenue-recycling, and alongside complementary policy measures – the proposals can achieve clearly progressive impacts. In short, they could serve as a tool to fight both inequality and the climate crisis.

Scenarios and key findings

Based on the granular insights on household consumption in the EU Household Budget Surveys (HBS) dataset, our modelling provides insights into distributional impacts both vertically (by income), horizontally (according to a range of socio-economic characteristics), and at three levels: EU-wide, between and within Member States (MSs). In this paper we report key findings related to the ETD reform in isolation and the combined impacts of the ETD reform and ETS2.