Stefan Nabernegg - Balancing distributional equity and public budget constraints in the fossil fuel phase-out

• Presenting author: Stefan Nabernegg (University of Graz)

• Authors: Stefan Nabernegg, Teresa Lackner

• Session: B02D - Energy - Tuesday 11:00-12:30 - Erika-Weinzierl Hall

Climate change and fossil fuel imports from geopolitically unstable regions are making a European fossil fuel phase-out a matter of great urgency. As a result, several European countries, including Germany and Austria, are pushing to implement a legal framework for a mandatory phase-out of fossil fuel heating systems. We analyse such a phase-out for the example of Austria, a country that is highly dependent on fossil fuel imports, especially Russian gas. While a mandated phase-out raises distributional concerns, public budget constraints call into question a full compensation of household investments for a phase-out. We use detailed microdata on households’ physical and legal living conditions as well as income and expenditure from the Austrian Household Budget Survey to derive household-specific public subsidies and estimated investment costs. Furthermore, we map the distribution of residence real estate from the European Central Bank’s Household Finance and Consumption Survey across the income distribution to account for ownership structures of rented dwellings. We estimate that the fossil fuel phase-out in the Austrian housing sector until 2040 amounts to an investment of € 17-37 billion (at pre-inflation price levels 2021), of which 54% are allotted to owned homes and 46% to rented homes. Under the current subsidy scheme, the public budget is additionally burdened by up to € 15 billion over the entire phase-out period, which would correspond to 7% of total public revenues of Austria in 2021. Assuming that owners finance the phase-out and are eligible for related subsidies, we find that the overall compensation is progressive across income groups. However, subsidies for high-income households (deciles 8-10) would receive a substantial share of 54% of government support. The specific subsidy program for low-income households (deciles 1-3) is appropriate to cushion the disproportionately high investment needs of single- and double family house owners but does not address low-income homeowners in multi-family houses and those living in cooperative housing where the rent is determined based on a cost-covering principle. Looking at estimates of investment needs together with subsidies in relation to household income, we find that the largest overall burden still falls on lowest-income home owners (decile 1), which on average have to invest 80% of their annual income. Middle income groups (deciles 4-7), on average have to invest 16% of annual income. Differentiating for different building typologies, the financial burden associated with the phase-out is highest for home owners in multi-family houses as these are likely to require complementary thermal renovation investment which are only partially subsidized. Considering the distribution of residence real estate across income, we find that 92% of the investment to phase-out fossil fuel heating systems in rented dwellings is attributed to high income households (deciles 8-10), where landlords in the highest income decile alone are liable for 75%. Given these structures and the existing legal framework in Austria, it is reasonable to attribute agency to building owners which would require to (i) classify phase-out activities as maintenance measure in tenant-landlord relationships instead of non-mandatory improvement measure and (ii) provide targeted financial support for different owner types. Specifically, we identify the need for increased financial support for low-income home owners in multi-family houses and cooperative housing which may be differentiated for renovation and heating system change. Moreover, financial incentives for landlords should take account of different legal relationships. Finally, given public budget constraints, we find strong arguments for introducing an income-based cap on subsidies for the highest income deciles.