Berlin, April 2021. It has been four months since the implementation of the carbon tax in Germany in order to achieve the global climate goals. EnergyLabs looks at the recent developments, what alternatives there would have been and why the decision on carbon pricing has been the right one in the current situation. The CO2 tax is the incentive needed for green-tech solutions; long-term investments into climate-friendly solutions and technologies.
For years now, the effects of global warming are noticeable in different parts of the world and to a variable extend: extreme heat, devastating floods and storms, coral bleaching, and rising sea levels – starting points of a downward spiral. Especially in recent years though, humanity started paying more attention to the climate crises and much more important, started to take action. More and more people, especially the young ones – afraid for their future on our planet – participate in the Fridays for Future movement. Big and small companies are aware of their responsibility to the environment, and governments agree on climate goals and legislations, to achieve those. Trying to control the excessive demand for finite natural resources is one of the steps towards a more environmentally friendly future. Additionally, forward-thinking ideas, especially in the field of energy and technology, to reshape our societies.
The critical climate situation is a topic in the press almost every day. Scientists recently stated that at least a tenth of the world’s glacier ice will have melted by the middle of this century. The latest climate summit and Earth Day 2021 which both occurred on the 22nd of April, set off once again an additional recognition and ambition to tackle global warming internationally. The leaders of the 40 countries participating agreed on submitting new and ambitious climate action plans, to reach net-zero emissions by 2050 and the goals of the Paris Agreement. According to recent decisions, the German government’s targets became more ambitious and climate neutrality is to be achieved as early as 2045.
Until recently, the heating and transport sectors have contributed little to climate protection, especially compared to the sectors energy, industry and aviation. However, it is essential to reduce the emissions in these sectors if the 2030 climate targets and climate neutrality in the EU by 2050 are to be achieved.
Was there an alternative to the carbon tax?
A national CO2 price can be implemented as a tax, similar to the one that is now in place in Germany. An alternative would have been separate emissions trading or the extension of the existing emissions trading to the building and transportation sector. Both instruments are equivalent in their goal to reduce carbon emissions if designed appropriately. Nevertheless, carbon pricing is easier and faster to implement. In the following, the advantages and disadvantages of the CO2 tax compared to (national) emissions trading are discussed in detail, based on a publication of the German Institute for Economic Research (DIW Berlin).
What is the EU Emission Trading System (EU ETS)?
The EU ETS was introduced throughout Europe in 2005. It determines reduction targets for defined periods and is the world’s first international emissions trading system. The total quantity of emission allowances (certificates) for a specific trading period (cap) is defined. One certificate entitles the holder of it to emit a ton of CO2 and for every ton emitted, a certificate must be submitted.
However, the situation becomes a little difficult in the areas of heating and transportation because private individuals would have to purchase the necessary emission certificates. The platform on which these would be traded, as well as prices, would presumably not be determined without problems and conflicts.
In theory, emissions trading is ecologically accurate and extremely cost-efficient. It is usually accompanied by environmental progress and technical innovations. However, currently, the EU ETS covers only a few sectors, and thus only a proportion of European and German greenhouse gas emissions. An additional problem is the low prices for the certificates. They should be set high enough that their existence provides an incentive for radical innovations that will make it possible to achieve the climate goals.
A fast and efficient implementation of the expansion of emissions trading is difficult. Not only throughout Europe but also in Germany, speedy action could fail due to necessary legal assessments and responsibilities. But time is a crucial factor when it comes to limiting global warming.
Carbon pricing in Germany – quick and effective
That being said, it seems that the choice to implement a CO2 tax seems to have been the right one. January 1rst 2021, Germany implemented a carbon tax, also known as carbon pricing, with the goal to lower the CO2 emissions in Germany. The amount that must be paid on top of every tonne of CO2 is a fixed price and will increase year by year, until 2026. Therefore, it cannot be considered an official tax but is working like one. The additional price must be paid for fossil heating fuels and gasoline of any kind. Following, we listed the price development for the coming years:
2021 25€ / t CO2
2022 30€ / t CO2
2023 40€ / t CO2
2024 45€ / t CO2
2025 50€ / t CO2
But what does that mean for the consumer? Let’s break it down: in 2021, additional costs of 7 cents per litre of gasoline or 7.9 cents per litre of diesel (including VAT), heating oil will be 7.9 cents more expensive per litre, while the price of natural gas will rise by 0.5 cents per kilowatt-hour (kWh). From 2026 on, the certificates will be traded freely on the market, with prices then determined by supply and demand. The total quantity of certificates and thus the maximum quantity of emissions in the sectors of heat and transport are to be limited in accordance with the climate targets.
What are the advantages?
A fixed price for greenhouse gas emissions had the advantages of planning certainty and price stability. Both create the necessary incentive for long-term investments into climate-friendly solutions and technologies, especially in private households and smaller companies. Another advantage is that the prices can also be adjusted based on the emission reductions achieved. Thus, the level of pricing is adaptable to achieved environmental effects.
The reform of the energy tax can be implemented in the short term on a national level, especially compared to the expansion of the ETS (on EU and/or national level) that would be more time-consuming, as stated before. There is less risk of climate protection measures being delayed due to legal issues and political enforcement problems.
Other countries are forcing the reduction of their emissions by using similar strategies. In Switzerland, a fee for heating oil and natural gas is paid since 2008. The CO2 cost per ton was the equivalent of 8 €. By 2018, the fee had risen to 85 euros. Over the same period, the emissions in the building sector fell by 20% in Switzerland, the fee is not a tax that flows into the state budget. The federal government and the cantons use one-third of the revenue to promote the energy-efficient renovation of buildings. Two-thirds of the revenue is distributed directly back to the population – equally to all people living in Switzerland.
In 1991, Sweden introduced a CO2 tax (50€/ tCO2) that has been raised to the equivalent of 110 €. In the Swedish heating and transportation sector, the emissions dropped by 28% since 2005. In France, the CO2 tax has been raised from 7€ in 2014 to 44,60€ in 2018. If you want to find out more about the effects of CO2 prices in other countries, have a look at the work the Berlin-based Mercator Research Institute is doing.
Since 2013, in the UK there has been a minimum price of the equivalent of 20,84 euros per ton of carbon dioxide in addition to the EU ETS. And the effects are visible: within five years, carbon emissions declined by 55%.
As stated earlier, a direct effect that can be noted is the one on the consumer. The increased prices for gasoline and heating are very visible. Energy use in buildings accounts for 40% of energy consumption in the European Union, plus a similar fraction of greenhouse gas emissions. Therefore, it is important to increase the amount of green energy used in public and private buildings, as well as reducing their absolute energy consumption. Energy efficiency is one of the biggest resources that we have when it comes to saving energy. Solutions like ActiveEnergy allow energy savings in buildings and thus reduce the carbon footprint effectively. Also, saving energy saves money. The CO2 tax is the incentive needed for green-tech solutions, long-term investments into climate-friendly solutions and technologies.