Distribution rights system will raise fuel prices - compensation for people with low income will only require a fraction of the revenue from system

Finland is committed to halving the amount of fossil fuel used in road transport by 2030. In autumn 2019, an economics research group proposed that the most effective way to reach the target is to create a distribution rights system for fuel sales in Finland where the distributor buys a state-provided sales permit tied to the carbon content of fuel for each litre of fuel the distributor sells. The system will raise fuel prices and thus encourage, for example, buying a car with lower emissions.

Now, a group led by Aalto University Professor Matti Liski has examined how to compensate for the price increase for different population groups, such as people with low income and those living in sparsely populated areas. The working group looked at the nearly three million privately-used vehicles whose owners pay vehicle tax, analysing the kilometres travelled, emissions, and the owners' incomes in order to determine how the costs of the current CO₂ tax are distributed among the population.

The data showed that one-quarter of Finland's private vehicles produce half of all private vehicle emissions. Fuel consumption is strongly focused on high-income population groups, and the differences in emissions are primarily explained by the kilometres travelled. For households with disposable income between EUR 70 000 and EUR 80 000, the average carbon dioxide emissions from driving are almost three times higher than households with annual income between EUR 10 000 and EUR 20 000.

In sparsely populated areas, road traffic emissions are higher per individual than in urban areas, but as a whole, urban areas produce more private vehicle emissions than rural areas due to larger population numbers.

The higher the income, the smaller the proportion of income paid in CO₂ tax with fuel purchases. For the majority of Finnish people who drive, the tax is less than one per cent of their income.

‘Our research showed that if the increase in fuel prices caused by the distribution rights system is only compensated for low-income households, such as households earning less than EUR 20 000, compensation will be possible by using a relatively small share of the system's revenue,' says Matti Liski.

In their report, the researchers present useful perspectives for creating different compensation models. Decision-makers can use the different models or some combination of them after deciding what kind of fairness perspective compensation aims for.

The economics working group’s report ‘Towards carbon-free transport – an analysis of the effects on income distribution’ (Kohti hiiletöntä liikennettä – analyysi tulonjakovaikutuksista) was published at a webinar organised by the Ministry of Transport and Communications on 27 October 2020.

Link to the report (in Finnish) on the Aalto Economic Institute webpage:

http://www.aaltoei.fi/wp-content/uploads/2020/10/AEI_raportti.pdf 

More information:

Professor Matti Liski
Aalto University School of Business, Department of Economics
+358 40 353 8173
matti.liski@aalto.fi