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Working paper / Climate

Cost Recovery of RES-E Support in Italy: A new Case for a Carbon Tax

Author(s): VERDE Stefano, PAZIENZA Maria Grazia

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Using household survey data, we investigate the distributional incidence of the A3 surcharge, which recovers the cost of RES-E support in Italy. The surcharge is found to be markedly regressive. The fairness of such a system is questionable as RES-E support is justified by public policy objectives. We thus consider a carbon tax as an alternative means for recovering the cost of RES-E support. The literature suggests that energy is a less necessary good than electricity, typically because motor fuel consumption more closely follows income than electricity consumption does. If so, a carbon tax would be less regressive than the A3. Our findings confirm this. Also, the cost of the carbon tax would be more evenly distributed, because its base is diversified. Furthermore, different economic and climatic conditions mean the A3 and the hypothesized carbon tax impact differently across regions. The impact of the A3 is about twice as big for southern regions compared to northern ones, while the carbon tax would impact similarly across the country. A reform that replaces the A3 with a carbon tax a) has no cost, b) achieves greater equity, and c) involves tax earmarking. These three elements should help making it accepted by the public.