German emission trading scheme: energy tax and climate money would be better

In the European Green Deal, the European Commission raised the possibility of including road transport in the European Emissions Trading Scheme. The suggestion has provoked serious criticism from environmental organizations. However, the system will be introduced in Germany from 2021. Bernadett Szabó, an economist and volunteer of the Clean Air Action Group, expressed her professional opinion on this topic.

The German government introduced a comprehensive climate action package in 2019. One of the bills was to establish a national emissions trading scheme for transport and buildings from 2021 onwards. At the end of the same year, the law was passed by the Bundestag (Gesetz über einen nationalen Zertifikatehandel für Brennstoffemissionen, in short: Brennstoffemissionshandelsgesetz, BEHG).

The European Union’s Emissions Trading Scheme (EU ETS) covers energy-intensive industries (such as oil refineries, steel mills), power plants, and aviation within Europe. However, it covers neither non-aviation transport nor buildings, which sectors rely heavily on fossil fuels and accounted for 32% of the greenhouse gas emissions in Germany in 2018. In the same year, thanks to the activities of several NGOs, these sectors have become the focus of political debates, and in 2019, a comprehensive package was passed, including a trading scheme for greenhouse gas emissions from transport and buildings.

There have been long debates about which would be better: introducing a fixed-price carbon tax, mainly supported by the German Social Democratic Party (SPD), or introducing a trading scheme similar to the EU ETS, advocated by the so-called Union parties: the Christian Democratic Union of Germany (CDU) and the Christian Social Union (CSU). Finally, the emissions trading scheme (BEHG) was adopted. The BEHG operates in parallel with the European Union’s Emissions Trading Scheme and covers areas not included in the EU ETS. Installations covered by the EU ETS are exempted from the German trading scheme by law, ensuring the avoidance of double charging.

The scheme applies an “upstream” approach, which means that only companies that place fossil fuels on the market will be involved in emission trading (the federal state estimates about 4000 companies). However, in the end, of course, fuel-using companies and citizens will pay for it through increased prices for natural gas, petrol, diesel, and other fuels.

The number of units required for each fuel is determined by the carbon dioxide emitted during combustion: the more carbon dioxide emitted by burning a fuel, the higher costs (a price calculator is available on the website of the German Chamber of Commerce and Industry, which calculates with the prices defined in the law until 2025, and where detailed information about the system can also be found).

The issuance, possession, transfer, and cancellation of certificates will be recorded in transaction logs and an electrical database with this information will be available.

In the introduction stage, the units (quotas) will be sold at a fixed price as follows: in 2021, companies can buy 1 unit for 25 Euros (1 unit allows 1 ton of CO2 emission), in 2022 it will cost 30 Euros, in 2023 it will cost 35 Euros, in 2024 it will cost 45 Euros and in 2025, they will have to pay 55 Euros for the same unit. It is worth mentioning that the government originally proposed lower prices (the price of 1 ton of CO2 would have increased from 10 Euros to 35 Euros over the same period), which was also passed, however, thanks to the criticism from experts, they decided on the prices currently set in the law with a later amendment.

After the introduction stage, units will be auctioned, but in 2026, companies will still have to stick to the price corridor of 55-65 Euros. It is also possible to define a price corridor from 2027, but a decision on this will be made next time in 2025.

The plan is that the state will invest the proceeds in the country’s climate protection measures and return them to the citizens in the form of aid and subsidies. For instance, they will gradually reduce the “EEG-Umlage”, which is a tax levied on the support of renewable energy, paid by citizens through their electricity bill (instead of the current amount which is 6.75 cents/kWh, they will have to pay 6.5 cents/kWh in 2021 and 6 cents/kWh in 2022).

The German national emissions trading scheme has been widely criticized. On the one hand, the legal question arises, whether the BEHG with initial fixed prices can be called a trading system. On the other hand, the new system involves a lot of extra administration, which imposes significant costs on companies and also reduces their international competitiveness.

Greenpeace expressed its opinion on the new law in a letter to the Federal Ministry of the Environment, Nature Conservation and Nuclear Safety (BMU). According to the environmental organization, increased introductory prices are still too low to change the behavior of individuals, industry, and the public sector. They criticize the lack of long-term planning, as the prices for the period after 2026 will only be set in 2025 and this uncertainty limits the willingness of the companies to invest and innovate. Besides, the government expects this system to be integrated into the EU ETS by the second half of the 2020s, however, this is based solely on speculation, its implementation is still questionable. Taking everything into consideration, Greenpeace says the following: the result is an expensive, overly bureaucratic and uncertain tool, and due to the low price of carbon dioxide, it is not expected to have attitudinal effects, and it cannot effectively contribute to the achievement of national climate goals and the Paris Agreement. They propose the introduction of an energy tax which would be cost-effective and feasible in the short term: 1 ton of CO2 emissions would cost 80 Euros which would be gradually increased to 180 Euros by 2030. In parallel, they would support the introduction of “Klimageld” (climate money) as a social compensation for low-income earners.

For similar reasons, the European Federation for Transport and Environment (T&E, of which the Clean Air Action Group is also a member) considers the inclusion of transport in the EU ETS to be a mistake. The Clean Air Action Group, agreeing with the concerns of T&E, also opposes the increase of fuel prices (which is an obvious result of the system presented above). On the one hand, this measure could greatly increase fuel tourism, as those who can do so will go to a country to refuel where fuel prices are lower. (Hungary already has a lot of experience in this.) On the other hand, the price of fuel cannot differentiate for example according to what other harmful substances the car emits, according to whether it is being driven in densely populated areas or far away from them, or how much it damages the roads. That is why the Clean Air Action Group has for many years been advocating a distance and pollution-based road toll levied on all motor vehicles on all roads (this may include a carbon dioxide emission component, too).