A new carbon price in Germany is set to increase consumers’ bill for fuels such as petrol and diesel by several cents per litre starting 1 January 2021. The German government in 2019 decided its fuels emissions trade law (Brennstoffemissionshandelsgesetz - BEHG) to introduce a CO₂ price on fuels used predominantly for heating and transport.
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 61 such initiatives in 2019, compared to 57 in the previous year.
Until now, however, greenhouse gas emissions from the transport and building heating sectors have not had a German or EU-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 more than a third of Germany’s greenhouse gas emissions (2019).
The national emissions trading system for transport and buildings will exist in parallel to the EU-wide ETS and cover the bulk of those greenhouse gas emissions not included in the ETS. There will be some overlap where fuels are already covered in the ETS, but would also be priced in the new system. The law already stipulates that companies will be reimbursed, but the German government said it will also introduce a regulation to avoid that companies have to pay twice in the first place.
The new system 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 the 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: 25 euros per allowance (tonne of CO2 equivalents) [means ~7 cents price increase for litre petrol, 8 ct/l diesel]
- 2022: 30 euros, 2023: 35 euros, 2024: 45 euros, 2025: 55 euros
- in 2026 in auctions, with a price corridor of 55 – 65 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
- the government expects the new system to generate revenues of 40 billion euros from 2021-2024 (period of current budget planning)
- revenues will be used to lower the renewables surcharge for power consumers (EEG surcharge), other relief measures for citizens and industry, and for climate action support programmes
- Based on projections the government expects the price to save 3.1 million tonnes CO₂ in 2025, 7.7 t in 2030 and 12.4 t in 2035
Carbon leakage risk
- The government aimed to decide a carbon leakage regulation to accompany the CO2 price legislation by the end of 2020, but failed to agree last details, reported Tagesspiegel Background. It plans to adopt it in early 2021. The regulation would ensure exemptions from the carbon price for certain companies in international competition to avoid that climate-harmful industry simply moves abroad
- A study by German Institute for Economic Research (DIW) says the new carbon price system does not contain a high risk of carbon leakage
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.
The European Commission has flagged extending emissions trading to sectors such as transport and heating as a key option to reach a higher 2030 climate target. It will make detailed legislative proposals by June 2021.
How the system was introduced
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 was adopted by the Bundestag with minor changes, and the Bundesrat gave the green light on 29 November, thus clearing the last hurdle for it to take effect.
However, after other aspects of the government’s climate package became part of negotiations in the mediation committee of Bundestag and Bundesrat, the price was tabled yet again. The Green Party – which is part of most state government coalitions – called for an increase. In a preliminary agreement from 16 December, lawmakers decided to amend the already adopted law and increase the price. The price increase was adopted by the Bundestag in October 2020.
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".
Criticism of low entry-level price and distributional effects
Originally, the government had proposed (and parliament adopted) a lower price, from 10 euros in 2021 to 35 euros in 2025, which was heavily criticised by experts and institutions such as the Mercator Research Institute on Global Commons and Climate Change (MCC). 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.
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.