ZEW Economist Holger Stichnoth on Federal Labour Minister Hubertus Heil’s Proposal

Federal Minister of Labour and Social Affairs, Hubertus Heil, has presented his plans for a so-called climate income (‘Klimageld’), a social compensation mechanism to relieve the burden on people with low and medium incomes in the face of high food and energy prices. Professor Holger Stichnoth, deputy head of the Research Department “Inequality and Public Policy” at ZEW Mannheim, has commented on this matter:

“Rising prices fuel deep divisions in society. Taking into account the social dimension of climate protection measures is absolutely right. However, it would be wrong to give too much weight to the current price increases due to the pandemic and the war when designing the climate income. The original idea must not be lost sight of: The climate income is intended to cushion the burden of higher CO₂ prices in the long term, which are necessary in view of the climate crisis. It would therefore make more sense to make a clear distinction between short-term reliefs through aid packages on the one hand and long-term support in the course of the energy transition on the other.

The climate income should be linked to the actual burden arising from carbon pricing and should not be understood as a general social aid programme, neither in the short nor in the long term. To ensure acceptance in the long term, the amount of money that the individual income groups receive should be determined by model calculations based on solid facts. How much energy do the individual income groups consume and how strongly are they affected by a rising CO₂ price?

Such details will play an important role in determining the amount that each income group should receive. Drawing an abrupt limit above a certain income is problematic, as exceeding this limit can even result in a loss of income. A better approach would be to gradually reduce its amount with rising income. In addition, it should be considered how the climate income interacts with other social policy reform plans such as the basic income scheme or the basic child allowance. In order for these financial aids to really reach private households in need, a well thought-out and consistent support system is needed.”