The history of the paper “Equity and the Willingness to Pay for Green Electricity in Germany”

Germany is commonly seen as a global role model in transforming its electricity system from fossil-based power generation to the “green” electricity production based on renewable energy technologies. As a result of this so-called energy transition (Energiewende in German), the share of green electricity rose from around 6% in 2000 to about 36% in 2017.

Sep 19, 2018
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Yet, this transition comes with large costs: Currently, the promotion of renewable energy technologies causes annual costs as high as EUR 25 billion, equaling almost 1% of Germany’s GDP. These costs must be borne by the electricity consumers via a coercive levy on the net electricity price. The fact that these costs steadily increased in the past triggered a vigorous debate about the social acceptance of the Energiewende. In several research projects funded by the Federal Ministry of Education and Research, we addressed this issue by eliciting households’ willingness to pay (WTP) for green electricity over several years (see, for instance, Andor et al. 2017), with our results indicating a diminishing WTP.

A further issue that may undermine acceptance of the Energiewende is the fact that the energy-intensive industry is allowed to pay a reduced levy. Although this allowance is intended to protect international competitiveness, it has resulted in a substantial inequity in bearing the burden of the promotion of green electricity. While the energy-intensive industry benefits from far-reaching exemption rules, all other electricity consumers are forced to pay a higher surcharge on the net price of electricity.  

Our interest in whether this inequity could affect households’ acceptance of Germany’s Energiewende was further piqued upon reading the book “The Winner’s Curse” by Richard Thaler (1992), the winner of the Nobel Prize in Economics in 2017. In this book, Thaler recounts an experiment used in an earlier article (Thaler 1985), which shows that due to the difference in perceived costs, high prices for a beer seem fair if it is purchased at a fancy hotel bar, but seem like a rip-off for a small run-down grocery store. Thaler (1992) concludes that notions of fairness can play a significant role in determining economic outcomes.

Inspired by Thaler’s conclusion, our work explores whether the exemption rules enjoyed by the German energy-intensive industry has an effect on the household’s WTP for green electricity. Reviewing the literature, we were struck by how little attention the relationship between fairness aspects and public goods has received. Notwithstanding an extensive theoretical literature on fairness motives, as well as many studies on the WTP for green electricity, empirical evidence linking fairness aspects with the WTP for public goods was surprisingly scarce (see the paper for the discussion of the existing literature). We therefore decided to set up an experiment to investigate the impact of the exemption rules for the energy-intensive industry on the WTP of households for green electricity.

In the end, we found the magnitude of the effect sizes remarkable. Abolishing the exemption rule virtually doubles the acceptance rate of promoting renewable energy, which increases from 38% to 74%, an effect that is much larger than reducing the household levy by 75%. We also found the effect sizes to be highly robust. While we believe that more research is needed to identify the mechanisms underlying these huge effects, we conclude that the cost allocation is a crucial determinant for the acceptance of the Energiewende. We are furthermore convinced that the relevancy of this insight extends beyond climate policy. In addition to a household’s own contribution to the provision of any public good, the allocation of the cost burden to others seems to be of similarly high importance.

The article in Nature Energy can be found here: https://go.nature.com/2xoAbRD

References

Andor, M. A., M. Frondel, C. Vance. Germany’s Energiewende: A Tale of Increasing Costs and Decreasing Willingness-To-Pay. Energy Journal 38(SI 1), 211–228 (2017).

Thaler, R. Mental Accounting and Consumer Choice. Marketing Science 4(3), 199-214 (1985).

Thaler, R. The Winner’s Curse – Paradoxes and Anomalies of Economic Life. Princeton, New Jersey: Princeton University Press (1992).

Manuel Frondel

Head of Department, RWI

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