CO2 Prices Are Also Good for Your Health

19 July 2023, by Moritz Drupp

Photo: Unsplash/Nik

Was the German eco-tax a flop? Since 1999, gasoline and diesel have been taxed nationwide. The initial plan was to increase the percentage every year. But in 2003, it was locked in at ca. 15 cents per liter, which is still the level today. Research to date has found the eco-tax largely ineffective – but just the opposite is true.

In order to limit climate change, we need to dramatically reduce carbon dioxide (CO₂) emissions. One way to do so is to impose a tax on gasoline and diesel. But what price actually leads to lower emissions? The government put the brakes on the eco-tax early on; did it have any effect at all? At Universität Hamburg’s Cluster of Excellence for climate research, CLICCS, my Ph.D. candidate Pier Basaglia and I are assessing the macroeconomic effects of CO₂ prices. We took a closer look at the transportation sector.

Moritz Drupp

How would Germany’s emissions have developed without the eco-tax? Unfortunately, we don’t have any “mirror universe Germany” where there was no eco-tax, so that we could compare. But our team found another way: We programmed a realistic “clone” of Germany, a model that represents the German transportation sector on the basis of key economic figures. We also used datasets from other industrialized countries – ones that are as similar to Germany as possible – that did not introduce an eco-tax in the assessment period. We combined this data to make the clone, which consists e.g. in parameters like income or the number of vehicles per capita.

To validate the clone, we simulated the thirty years before the tax was introduced and compared the figures with actual historical records. Since there are always minor variations from clone to clone, we made seven, just to be on the safe side. So, how effective was the eco-tax?

As the results clearly show: tremendously effective. Our comparison showed that, from 1999 to 2009, the transportation sector reduced its CO₂ emissions by ca. ten percent relative to the clone.

Why, then, has the tax previously been considered ineffective? Past studies conducted by the German Institute for Economic Research (DIW) simply compared Germany’s total emissions before and after rolling out the tax. But the entire economy changed, too, regardless of the tax. Germans became wealthier, started buying different cars, and drove more kilometers. Bearing this in mind, we were now able to calculate the tax’s actual effect.

And that’s not the only thing we discovered: The eco-tax also reduces annual particulate emissions and harmful nitrous oxide emissions by 27 percent and 13 percent, respectively. Unlike various types of climate damage, which predominantly concern the future, this represents a direct health benefit and reduces related costs. If we put these two factors together, the eco-tax saved us more than 40 billion euros in the course of a decade.

For our calculations, we drew on official cost estimates from the German Environment Agency (UBA). In 2012, the UBA worked on the assumption that one metric ton of CO₂ emissions translated into ca. 80 euros in subsequent costs for harm done to the environment and economy. Today, they have raised that number to over 200 euros per metric ton. As such, every liter of gasoline or diesel that we don’t burn saves us much higher societal costs than previously believed. The eco-tax is hardly a flop – it’s good for the climate and our health alike.