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Can the energy tax in Germany lead to a yellow vest movement?

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Leuphana Study: Can the Energy Tax in Germany lead to a yellow vest movement?
Graphical abstract. Credit: Energy Economics (2022). DOI: 10.1016/j.eneco.2022.106290

The CO2 tax extended by the German government to the transport sector in 2021 aims to reduce emissions of this climate-damaging gas. For motorists, it will have an impact in the form of rising fuel prices. If one remembers the yellow vest protests in France, the question of the social consequences of a higher CO2 price is obvious.

The economics professor Dr. Mario Mechtel from the Leuphana University Lüneburg, together with two colleagues from the Fraunhofer Institute for Applied Information Technology, has now examined in a study which income groups are particularly affected by a CO2 price. The study showed that there are ways to tax greenhouse gas emissions from road traffic in a way that does not place a disproportionate burden on low-income households.

For their study, the scientists developed a new, so-called microsimulation model. This allows them to distinguish between different types of households and to determine the effects of taxation on low, middle and high incomes. With the help of this model, they compared current taxation with three political reform scenarios in order to empirically examine their effects on the distributional effects of carbon pricing. They wanted to gain insights into how further increases in the carbon price would affect lower income earners in particular.

The current energy tax is based on fuel consumption for motorists and taxes a liter of petrol more than a liter of diesel. As the study shows, this model places a slightly disproportionate burden on lower income groups. This is mainly due to the fact that they are more affected by the higher taxation of petrol, as petrol-driven vehicles are more common in this group. The lower taxation of diesel, on the other hand, has a positive effect above all on higher income groups. There, diesel-powered vehicles are particularly common.

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One of the reform scenarios now being examined aims—with the tax revenue remaining the same—at reforming the energy tax, which would then no longer be calculated per liter of fuel, but would be based on the amount of CO2 emitted—regardless of whether it is produced by the combustion of petrol or diesel.

Since diesel fuel releases a larger amount of the climate-damaging gas when it is burned, this approach would mean that the previous preferential treatment of diesel fuel would no longer apply and the burden would be better distributed. Households with the bottom 60 percent of incomes would, on average, be relieved by this reform.

“We urgently need to make progress in reducing emissions of climate-damaging gases. The transport sector offers an important lever for this. We were interested in the extent to which a heavier burden could be imposed in a socially just manner. The results of our study show that even a fairly strong increase in the CO2 price would not have to lead to a disproportionate burden on lower income earners,” Prof. Mechtel summarizes the results of the study.

He points out, however, that the results are based on average values, so in individual cases there could be considerable additional burdens. Relief for the affected households would then have to be provided by other means.

The team of researchers is currently working on follow-up studies that will deal with issues such as increasing electromobility. They want to find out which households are more likely to buy electrically driven vehicles and what distributional effects result from the fact that individual transport is to be increasingly converted to non-fossil drives.

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For their study, the scientists used a data set that is unique for Germany. It not only includes data from over 150,000 households with more than 216,000 cars, but also takes into account vehicle-specific information on fuel efficiency, annual mileage and the distinction between different types of fuel.

The study is published in Energy Economics.

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