Free green services could substantially reduce emissions and improve climate justice

Carbon and energy taxes are an important component of many European climate change policy packages, aimed at avoiding dangerous climate change. However, in many European countries, carbon and energy taxes on home energy and motor fuels put higher burdens on poorer than richer households relative to their income. This is often perceived as socially unjust and undermines public support. New compensation mechanisms are needed to make carbon and energy taxes fairer and more environmentally effective.

In new research, we compared two possible compensation mechanisms funded using the revenue from the carbon taxes. We looked at equal per capita tax rebates versus an in-kind green vouchers scheme for free renewable electricity and public transport. The outcomes were modelled using data from 27 European countries. The study found:

• Both compensation mechanisms are equally redistributive and reverse the regressive impacts of carbon taxes on lower earners;

• Providing green vouchers provided the largest emissions savings, reducing home energy emissions by 13.4%, and motor fuel emissions by 23.8% across the 27 European countries;

• Carbon taxes on home energy were regressive in all 27 European countries; taxes on motor fuels were neutral or progressive in nine, mostly Eastern European countries;

• Both carbon taxes and tax rebates increased fuel and transport poverty, whereas the green vouchers reduced these.

The green voucher scheme would need additional public investments into renewable energy and public transport to meet increased demand, but this would be balanced by reduced climate change costs.

Overall, we find the green voucher scheme delivers both the best emissions cuts and fairest option. We therefore recommend green vouchers as the preferred option over tax rebates for addressing regressive impacts of carbon taxes.