Energy and climate hand-in-hand: financing RES-E support with carbon revenues

In Italy, the cost of support for renewable electricity (RES-E) is largely recovered through the “A3 surcharge”, which weighs heavily on electricity bills. Using household survey data, we show the A3 surcharge is markedly regressive. Carbon taxation in the non-ETS sector is envisaged as a means to reduce CO2 emissions cost-effectively and generate revenue to lower the A3 surcharge. A non-ETS carbon tax would be less regressive than the A3 surcharge and its cost would be more evenly distributed across households. We calculate the revenue of a €20/tCO2 non-ETS carbon tax would have allowed a cut in the A3 surcharge of about 68% in 2011, and 39% in 2012. The impact of the carbon tax plus the reduced A3 surcharge would have been less regressive, but the cost higher for most households. The restrictions imposed in the simulations mean the results are only appropriate to render first-round effects of the reform. Policy relevance: In the vast majority of the EU Member States, the cost of RES-E support is largely paid by electricity consumers, most often through specific surcharges. Rising electricity prices are a common concern given the implications for competitiveness and equity. The Member States facing this issue could conveniently address it through environmental tax reforms consistent with the Climate and Energy Package. Replacing RES-E surcharges with carbon taxes in the non-ETS sector would permit cost-effective reduction of CO2 emissions while allocating the cost of RES-E support more equitably. The difference in regressivity would stem from the different consumption patterns of home fuels (including electricity) and motor fuels across income distribution. A cross-country comparison of energy household budget shares proves the structural nature of this difference between home fuels and motor fuels. Moreover, the notion that electricity consumers should pay for RES-E support is questioned on the grounds that electricity is a basic necessity good and RES-E support is a means of providing public goods, notably energy security and climate protection. & 2015 Elsevier Ltd. All rights reserved.