For an overview of the various parties' and experts’ positions on carbon pricing, as well as the developments leading up to the government’s comprehensive climate package decisions from 20 September 2019 see our article "Tracking the CO2 price debate in Germany".
Germany, like all EU member states, participates in the European Emissions Trading System (EU ETS), which sets an overall limit on greenhouse gas emissions from power stations, energy-intensive industries (e.g. oil refineries, steelworks and producers of iron, aluminium, cement, paper and glass) and inner-European commercial aviation. The ETS is one of a growing number of carbon pricing initiatives worldwide. The latest version of the World Bank’s State and Trends of Carbon Pricing report counts 57 such initiatives in 2019, compared to 51 in the previous year.
Until now, however, greenhouse gas emissions from the transport and building heating sectors have not had an EU or German-wide price. The two sectors largely rely on fossil fuels, such as heating oil, natural gas, gasoline and diesel. Between them, these sectors are responsible for around 32 percent of Germany’s greenhouse gas emissions (2018).
Germany’s government coalition of Chancellor Angela Merkel’s conservative CDU/CSU alliance and the Social Democrats for years shunned the debate about introducing a price on CO2 emissions in these sectors, often for fear of upsetting voters, businesses or industry. However, a drought in the summer of 2018 and the Fridays for Future student climate protests pushed climate action to the forefront of the political debate and increased pressure to consider carbon pricing as a central measure to mitigate global warming and bring Germany back on track to reaching emissions targets.
In this environment and after months of talks, the coalition government presented a comprehensive climate policy package on 20 September 2019 that included the outline for a national trading system for greenhouse gas emissions from burning fuels in the transport and buildings sectors.
In the months of talks leading up to the climate package decisions, the coalition parties heatedly debated whether to introduce a tax on CO2 emissions – favoured by the SPD – or a national trading system for emissions allowances, called for by the CDU/CSU. The eventual proposal of a trading system with fixed allowance prices in the first several years is a mix of the two approaches.
In October 2019, the cabinet adopted a first draft of the National Emissions Trading System for Fuel Emissions Law.
It is going to be a cap and trade system in which the federal government sets an annual total emissions limit for transport and heating fuels in line with its annual total non-ETS targets prescribed by the European Union: The EU Effort Sharing scheme prescribes annual greenhouse gas emission budgets for all non-ETS sectors combined. However, these also include emissions that do not come from burning transport and heating fuels, such as methane emissions in agriculture. Those will not be covered by the planned German system.
Emission allowances are transferable and can be traded. They will generally be auctioned. However, during an initial phase there will be a fixed price at which they are simply sold to companies (2021-2025).
The federal government says the system’s implementation will cost companies about 31 million euros annually due to increased bureaucracy and necessary infrastructure installations.
The responsible government agency is the Federal Environment Agency (UBA).
What and who will be priced?
- Transport and heating fuels such as petrol, diesel, heating oil, natural gas and coal
- covers heating emissions in buildings sector and of energy and industry facilities not covered by EU ETS
- covers transport emissions except for air transport
- does not cover non-fuel emissions (e.g. methane in agriculture)
- participants are not emitters themselves, but companies that put fuels into circulation or suppliers of the fuels (upstream approach)
- government says this currently means about 4,000 companies will participate
- to avoid a double burden from the national system and the ETS, fuel deliveries to ETS facilities are exempt from the national price; where this leads to disproportionate administrative needs, there will be compensation
- fixed price in 2021: 10 euros per allowance (tonne of CO2 equivalents)
- 2022: 20 euros, 2023: 25 euros, 2024: 30 euros, 2025: 35 euros
- from 2026 in auctions, with a price corridor of 35 – 60 euros
- from 2027: market price, with option for price corridors (to be decided in 2025)
- during fixed price/price corridor phase: should emissions budget not suffice and targets in non-ETS sectors be missed, Germany uses flexibility of EU Effort Sharing scheme – this could include buying emission allocations from other member states
In the climate package decisions from 20 September, the government says it will push for an EU-wide cross-sector price for CO2 emissions. It sees this as the most cost-efficient way to reach climate goals.
Chancellor Angela Merkel floated the idea of forming a coalition of willing countries to introduce CO₂ pricing for sectors not covered by the ETS in May 2019. She said she had backing from other EU countries for the idea, adding: “[W]e need to reconsider how to find common methodologies to regulate the pricing of CO₂ in the areas not covered by emissions trade – buildings, transport and agriculture – as uniformly as possible, at least with a coalition of the willing.” The chancellor said she was not aiming for a common European solution initially because that would take too long. Merkel named the Netherlands as a possible ally, saying the country was currently debating CO₂ pricing.
Criticism of low entry-level price and distributional effects, legal doubts
Experts and institutions such as the Mercator Research Institute on Global Commons and Climate Change (MCC) generally welcomed the German government’s decision to introduce carbon emissions trading in sectors not yet covered by the ETS. However, they and a large group of stakeholders ranging from business associations to environmental NGOs have criticised the low entry-level price in 2021 and the following years. This would “hardly have a steering effect”, the MCC said, adding that long-term planning and investment security was lacking as the price post-2026 would only be determined in 2025. The carbon price would thus only have a limited effect on investments and innovation.
The German Institute for Economic Research (DIW) said in an assessment of the CO2 pricing effects that it would burden poor households more than rich households in relation to net income. Despite planned relief via a decrease in the renewables levy and an increase in the commuters’ allowance, the pricing system will lead to additional revenue for the state, the DIW said. Keeping a national CO2 price "socially fair" has been one of the government’s main arguments for starting with a price of only 10 euros per tonne. Since the publication of the assessment, the government has introduced some changes to the plans, which would, for example, allow low-income households to better profit from the commuters’ allowance.
Due to a compromise based on the demands of the government coalition partners, experts say the planned CO2 pricing system could face severe legal hurdles. As the proposal foresees the eventual creation of a trading system, but a fixed price during the early years – which Christian Lindner, head of the pro-business FDP party, calls “a CO2 tax in disguise” – a debate has erupted about the legal foundation for the price on emissions.
A legal opinion by the Institute for Applied Ecology (Öko Institut), published ahead of the final decision for the mixed system, points out that Germany’s Federal Constitutional Court previously made clear that an upper cap for emissions is necessary for a trading system to be deemed in line with German law. The current draft states that should the cap be exceeded during the early years of the system, Germany would buy additional allocations from other EU member states.
Without “substantial” changes, the planned CO2 price carries a “concrete risk of unconstitutionality”, Thorsten Müller, chairman of the Foundation for Environmental Energy Law (Stiftung Umweltenergierecht) wrote in a message thread on Twitter after the draft law was presented in October. Müller argues that a fixed price in a trading system would not be an admissible levy, adding that the government proposal does not meet the requirements for other forms of fees, such as a CO2 tax.
What happens next?
The federal parliament (Bundestag) will debate and decide the law over the coming months. The government would like the process to be completed by December 2019.
During the debate, parliamentarians might make amendments, which could include changes to the fixed prices prescribed by the government. “No law comes out of the parliament the way it has been introduced,” former German defence minister Peter Struck once said. However, major changes are generally unlikely as the government parties account for the majority in parliament.