06 May 2019, 13:55

Germany’s climate obligations under the EU Effort Sharing scheme

Germany is often perceived as a country with stringent national climate ambitions, but many of these rules and goals are actually prescribed by the European Union’s greenhouse gas emission reduction plans. Much of what is found in Germany’s highly disputed Climate Action Law draft – which the government would like to see passed by the end of 2019 – originates from obligations under the EU’s "Effort Sharing" legislation. This factsheet explains what the EU’s climate action targets in the non-ETS sectors entail, what flexibilities countries have in achieving them and how the bloc as a whole and Germany in particular are faring when it comes to reaching their emission targets and what non-compliance may cost.

Greenhouse gas emission limits for EU countries are set and pursued in two different areas, the so-called ETS and the non-ETS sectors.

Emissions from power generation, energy-intensive industries and civil aviation (around 45 percent of EU greenhouse gas emissions) are capped under the European Emissions Trading System (EU ETS), i.e. ETS sectors.

Greenhouse gas emissions from transport, buildings, waste, some (smaller) industries and agriculture (but not LULUCF) (almost 60 percent of total domestic EU emissions) are limited by an EU-wide target and split up into member state specific targets under the EU Effort Sharing Decision/Regulation – i.e. non-ETS sectors.

While the ETS is a cap-and-trade mechanism (for an in-depth explanation of the EU ETS see here) that has established a market place for CO2 allowances, effort sharing works differently.

Under the EU’s Effort Sharing Decision of 2009, member states together are to achieve an overall emission reduction of 10 percent by 2020 over 2005. Germany’s allocated emission reduction target for this period is set at minus 14 percent.

Under the new Effort Sharing Regulation (adopted in 2018), EU-wide emissions are to be reduced by 30 percent by 2030 compared to 2005.

Effort Sharing Regulation: EU-wide target for 2030 of minus 30 percent

The Effort Sharing legislation establishes binding annual greenhouse gas emission targets for each EU member state, mostly depending on its relative wealth (gross domestic product per capita) and some other adjusting criteria. This means rich countries like Germany (minus 38% by 2030 over 2005), Denmark (-39%) and Netherlands (-36%) have much higher responsibilities than for example Czech Republic (-14%), Hungary (-7%), Poland (-7%), Romania (-2%) and Bulgaria (0%). 

Unlike other emission targets, e.g. Germany’s national climate targets, the Effort Sharing Regulation doesn’t only set a final goal in 2030 but defines annual emission budgets for the years 2021-2030, following a linear reduction trajectory. These national budgets are called Annual Emission Allocation (AEA). The starting point and actual annual budget is determined according to the states’ average emissions between 2015/16 and 2018 and will be fixed according to the latest data in 2020

As a rule, each country has to fulfil its emission reduction targets itself, i.e. stay below its Annual Emission Allocations. To a certain degree, countries are given flexibilities within the system to make it easier for them to achieve the targets. They are allowed to bank, borrow, buy and sell emission allocations. According to the EU, this is to ensure a “cost effective and fair” achievement of the emission targets.

  • Banking (flexibility over time): In a year in which emissions are lower than the annual budget for a member state, this country can bank the unused allocations and use them in later years (there are limits to the banking of high cumulative surpluses)
  • Borrowing: In a year where emissions are higher than the annual budget, member states can borrow a limited amount of credits from the following year (10% between 2021-2025 and 5% from 2026-2029)
  • Buying and selling: Countries can buy and sell allocations from other member states that have emitted less than their budget would have allowed them. It is also possible for one member state to transfer up to 5 percent between 2021-2025 or up to 10 percent (2026-2030) of its annual allocation for one year to another country.
  • Use of ETS allowances: Certain member states (not including Germany, see Annex II of the regulation) are permitted to achieve national targets by covering some emissions with EU ETS allowances. For this purpose, they can withhold these allowances from auctioning. However, this can only be done for up to 100 million tonnes of CO2 between 2021-2030.
  • Land use sector extra credits: All member states are permitted to credit a certain percentage of emission reductions from land use, land-use change and forestry (LULUCF) against their emissions reduction targets (provided that these sectors have absorbed more carbon from the atmosphere than they emit). This benefits countries with large agriculture and forestry sectors but also acknowledges the fact that reducing emissions from these areas is more difficult than in other areas.
  • Safety reserve: Lower income countries (i.e. not Germany) can make use of a certain percentage of their pre-2020 reduction achievements (up to a total of 105 Mt CO2 equiv.) to comply with their Annual Emission Allocations between 2026-2030. The use of the safety reserve may not undermine the European Union’s minus-30-percent target.

Reporting and penalties

The European Commission evaluates and reports annually on the member states’ progress towards achieving the targets.

If a member state – despite using the flexibilities listed above – fails to comply with its annual emission reduction targets, it has to come up with a “corrective action plan,” including additional actions and a strict timetable for implementing them.

In a compliance check in 2027 and 2032, member states that lag behind in their emission reduction obligations will be subjected to punitive measures: Excess emissions multiplied by a factor of 1.08 will be added to the country’s emissions in the following year, therefore reducing the states’ overall emission allowance for that year; the country is temporarily prohibited from transferring part of its annual emission allocation to other member states.

The EU Commission can initiate infringement proceedings if member states don’t follow the rules. There are currently around 70 infringement proceedings pending against Germany.

The EU Commission tracked compliance with the Effort Sharing Decision here.

Progress towards achieving the 2020 and the 2030 effort sharing goals

All EU member states together are expected to overachieve the target of minus 10 percent greenhouse gas emissions by 2020 under the Effort Sharing Decision. By 2016 member states had achieved an overall reduction of 11.5 percent below 2005 levels. However, 2017 was the third year in a row which saw non-ETS emissions rise.

The building and transport sectors in particular have not been able to establish a continuous downward trend, while agriculture emissions are largely stagnating.

When looking at individual member states, the majority is on track towards achieving their 2020 goals but each year a group of around 10 countries fail to meet their annual effort sharing targets. In 2017 Austria, Bulgaria, Cyprus, Estonia, Finland, Germany, Ireland, Lithuania, Malta and Poland emitted more greenhouse gases than they were allocated. Projections for 2020 show that eight member states, with Germany one of them, will not meet their targets with the climate action measures currently in place, the European Environment Agency said in its 2018 report on Europe’s climate and energy targets.

How expensive will non-compliance be? Germany as an example

Germany will likely be one of the few countries not to reach its emission reduction goal in 2020 (minus 14 %) in the non-ETS sectors, but as other countries have saved more emissions than would have been required, the country will be able to buy allocations from them. The gap that Germany has to bridge is calculated at between 8.1 and 15.6 million tonnes AEA (translating to the same amount in tonnes of greenhouse gases) by the European Environment Agency. The latest federal budget proposed by the finance ministry includes 100 million euros per year for the purchase of allocations for the years 2018 to 2020.

There is no fixed system in place to determine how the buying and selling of CO2 allocations between countries is conducted. The 2009 Effort Sharing Decision provides for transfers to be “carried out in a manner that is mutually convenient, including by means of auctioning, the use of market intermediaries acting on an agency basis, or by way of bilateral arrangements”. So far only Malta has had to buy allocations to fulfil its obligations and did so in a bilateral deal with Bulgaria for the years 2013-2015. The two governments have not published the price or other details of their agreement; EU institutions were not involved in arranging the deal but were notified according to Effort Sharing Decision’s rules. Sweden on the other hand decided to cancel surplus emission allocations that it had accumulated between 2013 and 2015, meaning these cannot be transferred to other (underachieving) countries or used in later years by Sweden itself.

In the period of 2020-2030, the new targets and rules of the Effort Sharing Regulation (see above) will apply. At the moment, Germany is not expected to comply with its 2030 target of reducing emissions by 38 percent and following the corresponding downward trajectory in its annual emission budget in the years between. Researchers at the Institute for Applied Ecology (Öko-Institut) have estimated that Germany will emit an excess of 300 to 410 million tonnes of CO2 equivalents. A paper by think tank Agora Energiewende* puts the cumulative deficit by 2030 at an estimated 616 million tonnes if the current trend continues.

Since Germany’s options for the use of flexibilities are limited (no use of ETS allowances; limited use of LULUCF credits), the country will very likely have to acquire emission allocations under the Effort Sharing scheme from other EU member states. It is not clear how expensive this will be for Germany since it depends on supply and demand of non-ETS emission allocations and developments in other EU member states. Agora Energiewende lists certain influences on the price in its paper, such as the level of emission avoidance costs in the heating and transport sectors (60-130 euros per tonne CO2), which are typically a lot higher than in the energy sector or the level of national CO2 prices (e.g. in Norway, Finland, Switzerland, Sweden) which range from 50 to 125 euros per tonne of CO2. Using these benchmarks of between 50 to 100 euros per tonne of CO2 in the non-ETS sector, Germany could be faced with a bill of 30 to 60 billion euros for the whole timespan between 2021 and 2030, the think tank calculates (page 28).

Criticism of the 2021-2030 Effort Sharing Regulation

NGOs Carbon Market Watch and Sandbag criticise the “loopholes” that the flexibilities under the Effort Sharing Regulation offers member states, which could lead to an overall smaller reduction in greenhouse gases than is set in the 2030 target. This was of particular concern with the use of “external flexibilities”, i.e. with the EU ETS or the LULUCF sector, since this “does not ensure additional, long-term reductions and delays the required transition in the non-ETS sectors”.

Sandbag suggests that member states should engage in joint reduction projects, which would involve those countries with more stringent targets (and more money) to invest in efficiency and other projects in lower-income countries, provided that these projects include AEA transfers that are linked to verified emission reductions.

 

*Agora Energiewende and Clean Energy Wire are both funded by Stiftung Mercator and the European Climate Foundation.

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