Tax incentives reduce energy consumption - if effectively implemented

 (Image: Pixabay CC0)

(Image: Pixabay CC0)

By studying the effects of Basel’s electricity levy, researchers at the University of Lucerne investigated how tax incentives work in practice and how their impact on energy consumption could be increased.

The National Council and the Council of States decided not to debate the proposals of the Federal Council on the second phase of the Energy Strategy 2050 concerning the climate and energy tax incentive KELS. But as tax incentives were not ruled out in principle, researchers at the University of Lucerne analysed the impact of electricity levies on electricity consumption in the context of the National Research Programme "Managing Energy Consumption" (NRP 71).

"Tax incentives let consumers react in different ways and they are, therefore, cost-effective. But we don’t currently know if and to what extent tax-induced increases in electricity prices lead to changed consumption patterns in households and industry," says Simon Lüchinger, economics professor at the University of Lucerne.

Learning from Basel

The researchers wanted to find out how tax incentives influenced consumer behaviour and what shape a national scheme should take. With this in mind, they analysed the electricity levy that was introduced in the canton of Basel-Stadt as early as 1999.

A price increase by 8% per kilowatt hour was expected to promote electricity conservation in households and industry. Large-scale consumers were exempted.

In order to assess the levy’s impact, the researchers compared the actual overall electricity consumption of Basel-Stadt with the hypothetical electricity consumption without the levy. The hypothetical consumption was calculated based on the weighted average of the electricity consumption of comparable cities.

The results revealed that the levy had a limited impact as the actual electricity consumption is only 2-3% below the hypothetical consumption. Moreover, this difference is statistically insignificant.

The limited impact is probably linked to the fact that a fixed fee which had been in place was abolished at the same time. As a result, many consumers did not see a significant increase in their electricity bills despite the higher price per kilowatt hour. Saving electricity would have been worth their while but these consumers were probably not sufficiently aware of this and official communication was insufficient. In addition, the number of users who were exempted from the levy was relatively high.

Summarising the project results, Lüchinger says: "Basel’s electricity levy did not have a great impact because of the specifics of its implementation. Despite this, tax incentives are an attractive instrument. Thanks to a high degree of choice, consumers can select their preferred response options, which leads to a cost-effective reduction in electricity consumption. In order to succeed, schemes need to be straightforward and politically resolute: the positive impact of higher electricity prices should not be cancelled out by relief measures. This is particularly important because consumers seem to react to average prices rather than the actually relevant price of an additional kilowatt hour. In addition, the levy and its impact would have to be communicated in a clear and understandable way."

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