Does renewable electricity hurt the poor? Exploring levy programs to reduce income inequality and energy poverty across German households

Abstract

The transition of fossil to renewable energy systems involves substantial costs which, in many cases, are passed proportionally on to final energy consumers as levies on electricity consumption. In our paper, we investigate the impacts of renewable energy support levies on income inequality and energy poverty. In Germany, such a levy has led to a substantial increase in electricity prices. We employ representative pooled cross-sectional data including over 40,000 German households between 2003 and 2018 to estimate price- and income-dependent elasticities of energy consumption and simulate impacts on income inequality and energy poverty. The results of our microsimulation indicate that indiscriminate renewable energy support levies on electricity consumption do increase income inequality and energy poverty. Based on these findings, we propose to amend the levy and simulate the impacts of three different reform options on the households included in our representative data sample: (1) abolition of the levies, (2) levies that are income-progressive proportionally to the income taxes, and (3) a high and flat levy in conjunction with an income-degressive compensation payment. Our ex-post simulation and analyses for 2018 indicate that all analyzed reform options would have led to lower income inequality. But, more importantly, all three levy reforms would have substantially decreased energy poverty. Of the three reform options, a high and flat renewable energy support levy on electricity consumption in conjunction with income-degressive compensation payments entails the lowest level of income inequality and energy poverty with regard to the Gini and Atkinson indices and two energy poverty thresholds.