Is Germany fit for FiT55 in its climate policy design?: Addressing competitiveness, efficiency and equity concerns

This study assesses the economic efficiency and incidence of alternative climate policy scenarios for Germany using a multi-sector multi-region computable general equilibrium model. Scenarios combine CO2 pricing with regulatory measures to meet EU Fit For 55 emissions reduction targets, exploring different emissions pricing revenue recycling options. Incorporating international market responses and emissions abatement outside EU, we quantify sectoral impacts of climate policies and their incidence on heterogeneous households using German household survey data. Results indicate that compliance with EU Fit For 55 lowers GDP and disposable income relative to a scenario without additional climate policy changes. Yet, climate policy design strongly influences trade-offs between allocative efficiency, industry competitiveness, and equity. Recycling CO2 pricing revenues as lump-sum transfers to households reduces regressivity of emissions abatement. In contrast, using revenues to subsidise renewable electricity production increases regressivity and hampers allocative efficiency, but benefits emission-intensive and trade-exposed (EITE) industries by lowering electricity prices. Replacing differential CO2 pricing for EITE industries and the remaining economy with uniform emissions pricing improves allocative efficiency, but raises CO2 and electricity prices for EITE industries. Tariffs on embodied carbon offer less competitive protection to EITE industries than pre-existing output-based rebates, but reduce the regressivity of emissions abatement.