Climate levy – the debate and proposals for cutting CO2 emissions
- In an effort to cut power-sector emissions, the Federal Minister for Economic Affairs and Energy, Sigmar Gabriel, in March 2015 proposed that old, coal-fired electricity plants pay a levy when they exceed a certain CO2 emissions level. The levy would encourage the highly polluting plants to save CO2, but it has met fierce opposition from industry and unions. They fear it is the start of a move to eliminate coal from the power sector, threatening livelihoods in the coal industry.
- But the ruling government coalition buried the levy proposal after protests from industry and unions, choosing instead to mothball and later decommission some lignite power plants. The deal has since been included in government power market reform after becoming more concrete when utilities and government decided on an emergency standby reserve in October 2015.
- The country has just five years left to achieve its goal of cutting emissions by 40 percent from 1990 levels, as pledged. Analyses show it cannot do so without extra efforts. Despite the expansion of renewable energies, Germany still derives over 40 percent of its power from coal, more than most European countries. The following is a blow-by-blow account of the climate levy saga, starting with the latest development.
EU Commission approves state aid for closure of lignite-fired power plants
27 May 2016
The European Commission has found German plans to grant €1.6 billion public financing for mothballing and subsequently closing eight lignite-fired power plants to be in line with EU state aid rules. "The measure promotes EU environmental objectives, as it helps Germany to achieve its CO2 emission target, without unduly distorting competition in the Single Market. […] potential distortions of competition created by the aid are largely offset by the environmental benefits,” the Commission said in a press release. Whilst the costs for closing the plants will be borne by the operators themselves, Germany plans to compensate the operators for their foregone profits, the commission said.
German federal economics and energy minister Sigmar Gabriel called the decision in a press release “an important step for the continued realisation of the power market law, as well as the standby reserve”. According to the economy ministry's press release, this allowed Germany to take 13 percent (2.7 gigawatts) of lignite coal capacity off the market in the coming years, which allowed Germany to reach its national carbon emissions targets.
Read the EU Commission’s release in English here and the economy ministry' release in German here.
Cabinet decides power market reform, including brown coal standby reserve
The German government has approved wide reaching reforms of the power market and recent agreements about the transferral of lignite power plants into an emergency reserve before permanent phase-out. “With today’s cabinet decisions, we have opened a new chapter for the power market of the future”, said economy and energy minister Sigmar Gabriel in a statement.
Greenpeace criticised in a statement the government had created a “big present for the coal industry” and said more coal plants needed to be closed to reach climate targets. The environment and consumer protection NGO DUH said the government had chosen the most expensive way to reduce CO2 emissions.
Read the ministry’s press release here and find more information on the new power market law in German here and here.
Government agrees brown coal standby reserve with utilities
Coal power plant operators will gradually transfer 2.7 gigawatts (GW) of brown coal capacity into an emergency standby reserve as of 2016, the energy ministry and utilities RWE, Vattenfall and Mibrag agreed. The lignite plants will no longer operate, but will be mothballed as a “last resort” to secure power supply for four years before shutting down for good, a ministry press release said. The lignite reserve will cost around 230 million euros annually for seven years, i.e. 1.61 billion euros in total, the ministry said. Grid fees for consumers will increase by 0.05 cent per kilowatt-hour.
Economy and Energy Minister Sigmar Gabriel said: “The measure is important for reaching our climate targets and to make sure that affected regions will not suffer structural interruptions.”
RWE announced that it would transfer five power plant units with a capacity of 1.5 GW into the standby reserve. “It hits the company hard and means a huge burden for our employees. After all, our power generation from Rhenish lignite will decline by 15 percent,” said Peter Terium, CEO of RWE AG. The “necessary personnel downsizing” would be “socially cushioned,” the RWE release reads.
It was clear that 8 lignite fired power stations units would be transferred into the reserve by 2020 and shut down step by step, Michael Vassiliadis, head of the miner’s union IG BCE said. “What’s important about this is that the job cuts will happen without having to let people go.” He said the next thing that the government had to deliver was a programme for regional development to compensate for the job cuts in lignite mining areas.
The plan will save 11 to 12.5 million tonnes of CO2 in 2020 – an emissions cut that is necessary for Germany to achieve its national 2020 climate target. That is part of the 22 million tonnes it needs to cut to meet the target. The rest will come from energy efficiency measures. Emission reductions will be evaluated in 2018. If they are not sufficient, power station operators will have to suggest further measures, the ministry said.
Environmental NGO Germanwatch said the agreement on a lignite standby reserve was the first time in German history that coal power stations were taken offline to limit climate change, marking the beginning of the end of brown coal in Germany. However, the coal compromise was “bought at a high price," it said. Instead of power station operators paying a climate levy, they would be subsidised to shut down their plants, including two RWE units that should have been shut down due to their old age anyway, Christoph Bals, Germanwatch policy director, said. This made reaching Germany’s 2020 climate target far more unlikely.
Read the ministry press release in German here.
Read a Bloomberg article in English here.
Bloomberg: Germany considers emissions levy as CO2 reduction target wobbles
Germany may have to introduce a tax on emissions in order to meet its target of cutting CO2 emissions by 40 percent from 1990 levels by 2020, Franzjosef Schafhausen, the deputy director general of climate change policy in the Environment Ministry, told Bloomberg in an interview.
Read the interview in English here and a summary on CLEW here.
EU commission might yet thwart the lignite reserve
The planned reserve of lignite-fired power stations isn't necessary to keep Germany’s power supply secure and therefore is in breach of EU law, an analysis by Hamburg law firm Rechtsanwälte Günther and Energy Brainpool, commissioned by Greenpeace Germany shows. The economic analysis of the power market by Energy Brainpool showed that Germany has massive overcapacities. Even in 2023 when the last nuclear power station will go offline, there would still be an excess 11 gigawatts of power plant capacity, four times the amount envisaged for the lignite power reserve. If under these circumstances Germany couldn’t justify the reserve, the EU commission wouldn’t approve it under current state-aid rules, the lawyers conclude.
Read the analysis in German here.
The European Commission has doubts about whether the German government’s plan to put some old lignite power plants in a so-called capacity reserve is in line with EU state aid rules, the Frankfurter Allgemeine Zeitung reported, citing unnamed sources in the Commission.
A leaked draft of the new electricity market law shows the government is sticking to its plan to pay for a number of old brown coal power plants, which will be taken off-grid to serve as an emergency reserve.
Read an article on the draft law here.
Legal experts at the Bundestag (parliament) found that the coal reserve might constitute state aid, which might be difficult to justify before the European Commission.
Late-night deal -- the end of the levy
German commentators criticised the costs of the deal while environmental groups gave the compromise a mixed reception.
In late-night negotiations, the ruling government coalition buried the levy proposal, choosing instead to mothball and later decommission some lignite power plants that are most harmful to the climate in terms of emissions.
Read an article on the decision here and a factsheet with key elements of the deal here.
Read a summary of reactions here.
In the run-up to the crucial decision, media commentators continued their heavy criticism of the union proposal, arguing it meant much less in terms of emissions reduction at a much higher cost than the coal levy. The government was repeatedly attacked for giving in to the "coal lobby."
Decision on climate levy envisaged for 1 July
29 June 2015
A number of media commentators looked into the higher costs the alternative plan would mean for taxpayers or power consumers. At the same time, environmental groups urged Chancellor Angela Merkel to back the original plan, while the German Advisory Council on the Environment called for a timetable for the gradual phase-out of power generation from coal by 2040.
25 June 2015
Media commentators and many energy experts interpreted energy minister Sigmar Gabriel's comments as a clear sign that the climate levy was off the table. Now they wonder whether the alternative proposal would be enough to reach the emissions target, and who would have to pay for the new measures.
24 June 2015
Energy minister shows preference for alternative CO2 reduction proposal from power sector, saying if a climate levy on old coal plants risks structural ruptures, other options might have to be pursued.
Economy and Energy Minister Gabriel said months of debate over emission cuts from the power sector now left him with two options – following through with the climate levy, which he still believed to be the most cost-efficient instrument, or going with a proposal by the trade unions and power companies.
Power plant operators were convinced the climate levy would force the closure of power plants and lignite mines, while Gabriel still believed this wouldn’t be the case, he said on Wednesday.
“When experts say there will be no structural ruptures but the companies and the unions say there will be, it’s well-advised to assume the worst case scenario and better to get ready for possible alternatives that achieve the same goal,” Gabriel said. “But you have then to be prepared to pay the necessary price.”
In the light of this, Gabriel said he welcomed an alternative to the climate levy proposed by Michael Vassiliadis, head of industry and mining union IG BCE, and Garrelt Duin, economy minister of the federal state of North-Rhine Westphalia. Duin's state would bear the brunt of any measure as it is home to lignite mines, plants and the two largest utilities, E.ON and RWE.
Duin confirmed the alternative plan in an interview with regional TV station WDR. The final decision was due on July 1, but he was confident that "there will be an alternative," Duin was quoted as saying.
Their proposal involves shutting down some coal-fired power plants, step-by-step. Some old hard coal plants would be the first to close. They would be replaced by modern gas-fired combined heat and power (CHP) plants, which would be brought into the support system for existing CHP.
This would achieve a CO2 reduction of about 4 million tonnes, according to the proposal. A further contribution would be made by the lignite industry, which would close down power plants with a capacity of 2.7 gigawatts (GW) in stages, achieving a CO2 reduction of 12.5 million tonnes by 2020. These lignite power stations would be transferred into a capacity reserve.
Another 5.5 tonnes of CO2 would then have to be cut in other areas, to achieve the 22 million tonnes of extra savings by the power sector decided by the government in December 2014.
“We have prepared precise proposals, ranging from replacing old heating to climate action in cities and municipalities. But this has a price which will have to be paid from the federal budget,” Gabriel explained.
The argument for paying that price was a societal one. “The Energiewende will only happen if we take everybody with us. If we shut out members of society and allow the impression to take hold that their worries about jobs and livelihoods have to stand back in favour of the big goals, we will lose support for the Energiewende.”
“I think with the two alternatives we can take a political decision and I am sure we will manage that in the coalition talks on 1 July,” Gabriel concluded.
Following Gabriel’s speech to journalists, head of utility lobby BDEW, Hildegard Müller, commented that Gabriel “has shown clear sympathy for the union’s proposal.” She criticised that while Gabriel was strongly advocating the benefits of market forces in the energy only market (EOM), his own instrument (the climate levy) was “adjustable at every corner” later on, something that would in no way inspire the confidence of the energy sector, she told the Clean Energy Wire.
The miners' union IG BCE said in a statement after Gabriel's speech that there was now an important opportunity to link climate action with "economic sense" and "social responsibility". It added that the minister clearly did not want a structural rupture.
"Basically the door is now open for a solution which does not overburden companies nor regions," said IG BCE head Michael Vassiliadis.
Entering the last round
15 June 2015
A reserve for old coal-fired power stations as suggested by trade union IG BCE and industry association BDI would generally be a suitable alternative to the concept of the climate levy, think-tank Agora Energiewende says in a press-release. But it would have to accommodate at least 4 to 6 gigawatts of lignite capacity, in order to cut more CO2 emissions than a business-as-usual scenario. The reserve would have to include 18 to 20 old lignite blocks, Patrick Graichen, director of Agora Energiewende said. Otherwise the money would be spent on plants that would have been mothballed anyway. Agora Energiewende shows in a table which proposals for reducing emissions from the power sector are currently on the table and how much CO2 each could save.
Consultancy Enervis suggests in a study commissioned by Agora Energiewende, that by mothballing the oldest lignite and hard coal fired power stations a few years earlier than technically planned, emissions from the power sector could be reduced by 40 percent in 2020 (compared to 1990), while the wholesale power price would increase by max. 0.4 cent/kilowatt-hour.
Having examined the IG BCE / BDI proposal’s calculations for a “capacity reserve for security of supply and climate action,” Claudia Kemfert, of German Institute for Economic Research (DIW) told the Clean Energy Wire: “We don’t need the proposed capacity reserve to secure power supply. And when looking at the climate effect, transferring 2 gigawatts of power station capacity into the reserve would be an absurdly small contribution – it would save an estimated five to 10 million tonnes CO2. According to Kemfert, the reserve would not help to close the gap between business-as-usual cuts in CO2 and higher reductions needed for achieving the 2020 target, very much like Agora Energiewende also found.
Since the power stations in the IG BCE/BDI reserve would receive payments, plants that were scheduled to go offline anyway, would be given “a golden handshake” – this would be unacceptable, Kemfert told CLEW. According to Kemfert, the reserve would not even prevent the “domino effect” which was one of the main reasons for trade unions and industry to oppose the ministry proposal for a climate levy. “If some lignite stations are mothballed, this leads to higher costs for the aligned mines. Following the logic of the lignite plant operators, this would lead to more shut-downs and a ‘social black-out’, but now the companies admit that there is still some leeway for plants to go offline or into the reserve.”
11 June 2015
Speaking at a press conference, the head of chemicals and energy industries union IG BCE, Michael Vassiliadis said all proposals in the current debate with the Ministry for Economic Affairs and Energy were still on the table and all parties were open to discussing them further. The IG BCE had made its concerns over the risks of the climate levy heard.
In recent weeks, discussions have been focused mainly on which and how many power stations could be put on reserve, Vassiliadis said. After very cumbersome talks, the IG BCE had been able to prove to climate levy advocates that “in reality, rather than in a calculated model,” the levy would lead to immediate power station closures. Due to the combination of the nuclear phase-out, CO2 reductions, other market distortions and the growth of renewables, power companies simply didn’t have the flexibility for any cross-financing to adapt to the climate levy.
“We are at a point where we can solidly show how the 22 million tonnes can be saved,” Vassiliadis said. From his point of view, an agreement could be reached in the coming week.
Representatives of the German Wind Energy Association (BWE) argued that a national measure to implement the G7 pledge was needed, saying the government should back energy minister Gabriel and the climate levy. “The climate levy is a way to kick off a secure process for the next 20-25 years, which will give planning security for all actors,” Jan Hinrich Glahr (BWE Berlin-Brandenburg) and Klaus Schulze Langenhorst (BWE North-Rhine Westphalia) said in a statement. Current over-capacities of coal in the power market were leading to market distortions, which in turn is boosting CO2 emissions, despite growing renewable energy sources in Germany.
10 June 2015
On Tuesday, 9 June, energy minister Sigmar Gabriel (SPD) met with trade union and state representatives to discuss CO2 reductions from the coal sector. Industry representatives offered to “voluntarily” take 2,500 megawatts (MW) worth of power stations offline and transfer more into a new reserve (see below) if the minister scrapped his climate levy, Andreas Mihm wrote in the Frankfurter Allgemeine Zeitung after the meeting. But the ministry wants 1,000 MW more, the author writes. Participants told Mihm negotiations would continue over the coming days. They seemed hopeful of an agreement before the coalition government's talks next week, which are aimed at coordinating policy, Mihm writes.
The Rheinische Post quoted Member of Parliament Hubertus Heil (SPD) as saying that the different measures proposed would now be thoroughly evaluated and by the end of June there would be a decision on a new instrument.
After G7 pledge to decarbonise economies: “Merkel has to prove her credibility at home”
10 June 2015
Even as commentators and NGOs applauded G7 leaders’ pledge at their summit in Germany to decarbonise their economies by the end of the century and to transform the energy supply by 2050, environment activists said that German Chancellor Angela Merkel had to deliver at home too. Merkel must prove her credibility and ensure Germany finds a way to substantially cut emissions from the power sector, particularly from old coal plants, they said.
“Only a few days after Elmau, the German government is jeopardising its credibility in climate action,” a press release from Germanwatch, Greenpeace, WWF and other environment organisations reads. The government would not succeed if it tried to fix “the massive climate target gap” with little bits and pieces, Hubert Weiger, head of Friends of the Earth Germany (BUND) said. New and additional measures are required if the government is to adhere to its own climate targets.
09 June 2015
Green Budget Germany (FÖS) said Sigmar Gabriel’s original proposal for a climate levy was still the most efficient way of reducing CO2 emissions from old coal, but that the proposal was at a delicate point and close to collapsing politically. However, the suggested alternatives (i.e. the IG BCE/BDI proposal) would turn out to be more expensive for consumers and would interfere far more with the power station operators’ freedom of choice.
Industry and trade union contender: IG BCE and BDI suggest “capacity reserve for security of supply and climate action”
04 June 2015
Leading German industry association BDI threw its weight behind mining union IG BCE’s efforts to thwart government plans for an additional levy on old coal-fired power stations. The groups published a joint study arguing that putting power stations with high emissions on reserve and giving additional financial support to combined heat and power plants could protect the climate much more cheaply than the energy ministry’s climate levy.
The IG BCE suggested creating a “capacity reserve for security of supply and climate action.” This would keep some coal-fired plants in operating order to ensure a reliable power supply, but they would only be used when renewables failed to provide enough power. Between 2017 and 2019, two gigawatts of fossil power capacity should be contracted for the reserve, consultancy Frontier Economics who wrote the study for the IG BCE, suggests. After spending four years in this reserve, the power stations would be shut down (“no-way-back” rule), according to the plans. Depending on the amount of capacity on reserve, the instrument could contribute CO2 savings of 15-20 million tonnes, the study summary says.
The IG BCE also suggests further development of combined heat and power (CHP) stations (also see CLEW factsheet “Combined heat and power – an Energiewende cornerstone?”). CHP support should be increased and extended to 2025, by which time 25 percent of Germany’s power production would be covered by CHP. If successful, this would lower emissions (from displaced fossil heating and power sources) by 10 million tonnes in 2020, the study calculates.
According to the analysis by Frontier Economics, the IG BCE/BDI plan would only cost 1.1 billion euros, whereas the ministry plan would cost consumers an additional 4.3 billion euros until 2020. “In contrast to the climate levy, the implementation of the IG BCE proposals avoids extensive structural ruptures and the loss of jobs,” BDI president Ulrich Grillo said in a statement. He added the government’s climate levy would unsettle investors and also permanently disrupt European emissions trading.
Furthermore, the IG BCE has suggested a bonus scheme for scrapping old heating systems. This could save over 10 million tonnes of CO2 per year and would cost 6 billion euros annually.
Asked for a brief analysis of the IG BCE proposal, Claudia Kemfert of the German Institute for Economic Research (DIW) told the Clean Energy Wire: “Transferring power station capacity into a reserve can make sense – but it depends very much on how the payment to power stations in the reserve is configured. Unfortunately the study does not look at this.” Just how much these operators would receive will determine whether they even want to participate, in addition to the extra cost to consumers, Kemfert explained. While the IG BCE assumes a domino effect leading to mine and power plant shut-downs and job losses from the climate levy, such an effect was not looked at for the proposed capacity reserve, Kemfert pointed out. When the DIW assessed the government’s original climate levy proposal, it concluded this would only minimally increase power prices, Kemfert said.
When looking at potential job losses (IG BCE claims this could be up to 100,000), the Federal Environment Agency (UBA) found no more than 4,700 jobs were at stake if the climate levy actually resulted in power station shutdowns. At the same time, new jobs would be created at gas- and hard coal-fired plants, for which usage would increase. The number of jobs in the renewable energy sector was also still growing.
Tweaking the climate levy proposal to ease industry concerns
19 May 2015
The planned climate levy could be lowered and special rules created to prevent closure of old brown coal plants, an energy ministry paper suggested. The draft proposed reducing annual carbon emissions savings from power sector to 16 million from 22 million tonnes.
The adjusted proposal would increase allowed CO2 emissions from older plants without penalties. All fossil-fuel power stations older than 37 years could produce 3.8 million tonnes of CO2 per gigawatt of capacity before the climate levy kicks in, up from a maximum of 3 million tonnes for all power stations older than 41 years. This would “improve the economic viability of old power stations,” the new draft proposal said. Emission reductions could come from combined heat and power instead.
After talks with electricity producers, the ministry also proposed adapting how the levy was calculated. Instead of a fixed payment of 18-20 euros per excess tonne of CO2, the climate contribution should rise and fall with the wholesale price for power and the price for emissions trading allowances on the market. This would ensure that power stations are able to earn enough to cover their costs and remain viable. And it would make the climate levy more compatible with the European Emissions Trading System (EU ETS), as the climate levy falls when the price for allowances rises.
For special hardship cases among lignite-fired power stations (e.g. high transport costs from mine to plant), the new proposal promised special rules. Instead of reducing emissions mainly from the brown coal sector, the new mechanism would more strongly target hard coal-fired stations to achieve a fuel-switch from hard coal to natural gas, the new paper said. Read more >
Utilities urged to face reality in row over coal levy
27 April 2015
The environment ministry rebuffed utilities’ criticism of the planned levy for coal-fired power plants and maintained the sector shoulder its share of CO2 emissions cuts. Government and researchers stressed the need for efficiency gains in the housing sector if climate targets are to be met. Read more >
Researchers rebuff claim of major job losses from coal levy
16 April 2015
The researchers that prepared the German government's proposal for a levy on old coal-fired plants rejected union claims that the plan would cause massive job losses in the lignite industry and beyond. The Institute for Applied Ecology and think tank Prognos explained that one of the central premises of the levy was to avoid the closure of power plants and insisted it will achieve that aim. Read more >
The original “climate contribution” proposal
20 March 2015
The climate contribution (or climate levy) is part of Germany’s Climate Action Programme, designed to ensure it will meet its own emissions targets by 2020. The power sector is responsible for 40 percent of the country’s greenhouse gas emissions. Projections showed in 2014 that Germany would miss its climate target without further steps. Because emissions from old lignite (brown coal)-fired power stations have been very high, the climate levy specifically targets these plants, giving them a certain emissions allowance depending on their age.
Power stations that have been operating for more than 20 years would be permitted to emit a maximum of seven million tonnes of CO2 per gigawatt of installed capacity, the government proposal said. Older plants would be allowed even fewer emissions – down to 3 million tonnes for a 41-year-old plant. The value of these additional allowances should amount to 18-20 euros by 2020 for each tonne of CO2 they emit beyond the limit, the paper said. In 2014, the average price of one EU ETS allowance (for 1 tonne of CO2) was 5 euros.
Power plants younger than 20 years wouldn’t face any restrictions. Overall, 90 percent of the power generation from fossil fuels would not face any additional costs. Read more >
See a Federal Environment Agency (UBA) assessment of climate contribution in German here.
See an analysis of the climate levy by Consentec consultants in German here.
See a Green Budget Germany (FÖS) paper on the climate levy in German here.