Climate change is one of the main societal challenges of our time. How can poorer sections of the population be taken into consideration and how can we at the same time reduce the CO2 emissions? Answers to this question provide Dr Dieter Ewringmann and Prof. Klaus Mackscheidt from the Institute for Public Economics at the University of Cologne (FiFo Cologne) in FiFo Discussion Paper 22-3. They recommend a CO2 levy for Germany, which finances a climate fund and includes transfer payments.

In such a fund, according to Dieter Ewringmann and Klaus Mackscheidt, the entire revenue accrues to the energy and climate policy objective, a break with the so-called non-affectation principle. CO2 levies should therefore not be included in the general public budget, as they would be subject to the political fluctuations of parliamentary decisions. In the light of the constitutional framework, this could be done in the context of a non-tax levy.

A mixed use of the revenue would counteract the risk of loss of acceptance. Since CO2 levies could not take individual capacity into account, people with low incomes are particularly affected. Moreover, the benefits of the levies will only be apparent in later generations. Therefore, Dieter Ewringmann and Klaus Mackscheidt propose transfer payments, especially for people with low incomes, but also measures to promote substitution potential.

The public can act as a supervisory body. In this way, fulfilment with or failure to meet the climate targets and thus the work of the CO2 fund can be regularly monitored and publicly discussed. The financing and repayment plan, which is independent of the debt rules of the Constitution, can also be monitored by the public.

The development of the CO2 fund would be the following: Initially, the fund collects a lot of CO2 levies. The assessment basis is still very large at the beginning since many fossil fuels are still being used due to the lack of cheap CO2-free alternatives. Substitution processes are therefore promoted in this phase. To create the necessary acceptance among voters, parts of the revenue should also be distributed to low-income households. If the consumption of fossil energy gradually decreases, the assessment base decreases, there is more scope for evasion and distribution rates can be increased. The fight against the consumption of fossil fuels could thus be stepped up even further. Once the final objective, that is to say, the renunciation of fossil fuels, has been achieved, the fund ceases to exist.

Dieter Ewringmann and Klaus Mackscheidt concede, that the process might be too slow in the eyes of some climate activists. Besides, politicians, specialised in social welfare, could call for more support to be provided to the lower- and middle-income groups. However, it is not a question of distribution policy, but of ensuring the introduction and long-term stability of the allocation mechanism against political opposition. In the future, the CO2-fund solution would become ever more effective.

• FiFo Discussion Paper 22-3 „Lenkungssteuern und Lenkungsabgaben“