Subsidies and CAC Regulation Are Making Heat Transition Unduly Expensive
Questions & AnswersInterview with ZEW Economist Kathrine von Graevenitz
In Germany, the buildings sector ranks high in terms of its amount of both final energy consumption and greenhouse gas emissions. The aim is to reduce its CO2 emissions from the current 117 million tonnes to 72 million tonnes by 2030, and to virtually zero by 2050.
In order to achieve these goals, the German government has recently adopted a climate package that combines subsidy programmes with command and control (CAC) regulation, CO2 pricing and information provision. In this interview, ZEW environmental economist Kathrine von Graevenitz, PhD, discusses the effectiveness of these measures.
As part of its climate package, the federal government included a CO2 price of ten euros per tonne from 2021 onwards, which will rise to 35 euros per tonne by 2025.
Are the climate targets achievable with these measures?
First of all, the introduction of explicit pricing of CO2 emissions in the transport and buildings sectors is to be commended. However, merely introducing pricing does not automatically translate into met objectives. An emissions trading system with a strict cap would ensure the reduction target is met. But such a cap is not intended for the national emissions trading system – instead the price will be capped from 2026 onwards. This reduces price uncertainty for regulated stakeholders albeit possibly at the expense of meeting the target. Moreover, the CO2 price planned for 2025 is clearly too low; according to its current statement, the Monitoring Commission for the Energy Transition recommends a CO2 price of 50 euros, with significantly higher prices in the future.
What are the benefits of the subsidies planned by the Federal Government for energy-related refurbishments and regulatory measures in the buildings sector?
The subsidies reduce costs associated with energy-efficient retrofitting. However, free-rider effects are to be expected because homeowners who would have refurbished their property anyway are now financing it with subsidies or tax breaks from the government. Regulatory measures such as a ban on new oil heating systems could in turn increase the cost of refurbishment, which may lead to a refurbishment backlog. Rebound effects can often be observed in both cases: more efficient heating technology makes heating cheaper, which in turn affects consumer behaviour. Thus, the realized savings are often lower than previously expected. Regulation through subsidy or regulatory instruments is generally less cost-efficient than CO2 pricing and makes the heat transition unduly expensive. In an emissions trading system, costs are not only the lowest possible – they are also transparent. The marginal abatement cost corresponds exactly to the CO2 price formed on the emissions market. Such transparency does not exist in the case of subsidies and regulatory measures.
What are the consequences of CO2 pricing and subsidies for property owners and tenants?
CO2 pricing hits low-income households relatively harder due to higher heating costs. Homeowners may reduce CO2 emissions associated with heating by investing in retrofitting. For instance, they can switch from CO2-intensive oil to less polluting natural gas, or increase their house insulation. Tenants normally don’t have these options. They can only adjust their heating behaviour by using their heating less. The planned tax incentives for investments thus only benefit property owners, while tenants are left out on that score. Moreover, property owners are more frequently represented in the higher income brackets than tenants.
Is there potential for improvement in climate policy measures for the buildings sector?
The Federal Government would have to establish CO2 pricing as the lead instrument of climate policy, eliminating the need for most of the subsidies and regulation measures. It’s also essential that we systematically review both existing and new measures introduced under the Climate Action Plan 2030 regarding their actual efficacy and cost-effectiveness. This is only possible, however, if the corresponding data on refurbishment and heating behaviour is collected and made available to research. Counting the number of cases in which subsidies were granted or the amount of subsidy expenditure alone is not sufficient for such an evaluation.
