Environmental protection in germany: where does the coal for the climate come from?

How can CO2 emissions be reduced more quickly? When the climate cabinet meets on September 20 to discuss these issues, money will always be at stake.

Protesting until politicians act: Demonstrators at the Fridays for Future protest Photo: imago images / IPON

Emissions trading, CO2 tax, climate bonds: What financial levies and incentives can drive climate action, and how do these options interact? We provide an overview ahead of the climate cabinet.

▸ The price

Emissions of climate-damaging carbon dioxide are to become more expensive. In principle, the CDU, CSU and SPD agree on this, as does the opposition in the Bundestag consisting of the FDP, Left Party and Greens. Only the AfD sees things differently. The price of fossil fuels is likely to rise – primarily for gasoline, diesel, heating oil and natural gas. The main concern here is exhaust gases from vehicles and buildings. By increasing costs, policymakers want to bring about a change in consumer behavior – away from conventional fuels and toward renewable energy. The government and the Bundestag can influence the level by setting a higher government surcharge on the price at which companies offer the energy.

▸ Emissions trading

One mechanism for making fossil energy more expensive by the state is emissions trading. At the European level, this is already underway for power plants and large industrial facilities. The European Union in particular is leaning toward the idea of establishing an additional, national emissions trading system for transportation and buildings. This is how it would work in principle: On behalf of the German Emissions Trading Authority of the Federal Environment Agency, the Leipzig Power Exchange auctions pollution allowances to oil refineries and other companies that sell fossil energy in this country. These certificates are permits for the emission of exhaust gases. For every ton of carbon dioxide (CO2) emitted, polluters must buy a certificate.

The companies then pass on the cost of the certificates to the end customer prices for gasoline and heating. To reduce emissions, fewer allowances are then auctioned each year. So supply falls relative to demand – causing the price to rise. Air pollution becomes more expensive. To prevent sharp, short-term price increases for consumers, lower and upper limits could be defined.

One problem with this is that national emissions trading for transport and buildings does not yet exist. "This would be a completely new approach for Germany," says Christoph Kuhleis, chief economist at the Emissions Trading Authority. Fuel producers, traders and volumes sold would have to be recorded. The auction platform would be put out to tender. The emissions trading office would need more staff.

"Preparations would take more than two years, so the system would not be expected to start before 2022," Kuhleis estimates. On the other hand, CDU-CSU parliamentary group vice-chairman Andreas Jung argues that this must and can be done more quickly. He says the new system should be up and running as early as 2021.

▸ The carbon dioxide tax

SPD Environment Minister Svenja Schulze advocates a CO2 tax instead of emissions trading to send the behavior-changing price signal. This is comparable to the current energy taxes on mineral oil and electricity, only geared to the degree of CO2 emissions in each case. Whereas in emissions trading the quantity of allowances is precisely defined and the price fluctuates with supply and demand, the opposite is true of the tax. Here, the legislator defines the exact surcharge – for example, initially 10 cents per liter of gasoline – and hopes to trigger a reduction in the amount of exhaust gas.

How long this will take and what tax increases will be necessary before it works, however, is not known. Perhaps people will continue to drive their gasoline cars despite higher costs because there are too few alternatives. Citizens would pay on top, but exhaust emissions would not go down.

That is an argument against the tax and for emissions trading. Many people from the CDU and CSU also reject the tax solution because they simply don’t want a tax increase. However, the Union is not entirely consistent. Airline tickets would have to become more expensive in some cases, they say – by means of higher government levies. Conversely, rail travel is to become cheaper by reducing the value-added tax from 19 to 7 percent for long-distance travel as well. In addition, it seems realistic that the vehicle tax will soon be lowered for low-CO2 cars, but will rise significantly for cars with high emissions. That, too, would be a price signal. "The bottom line is that citizens should not pay more," emphasizes CDU politician Andreas Jung, however.

▸ A social balance

This is what Environment Minister Svenja Schulze promises. As compensation for the higher tax on fuel and heating, she proposes a per capita premium for all citizens, "precisely to relieve the burden on small and medium incomes." Everyone would receive, for example, 80 euros per year paid out by the state.

Because the transfer to 82 million people whose account numbers are not centrally recorded seems too complicated, CDU politician Andreas Jung would rather raise the commuter allowance. This is deducted from taxes as compensation for the commute to work. But this would also reward commuting in fat dirty cars. To that, Jung says, "There should be a climate signal here, too: Those who take the train, for example, could receive a significantly higher tax deduction."

In addition, the CDU and CSU advocate reducing the levy for financing renewable energies (EEG levy) on electricity, which most customers pay today. Overall, the message is: the state makes CO2 emissions more expensive, but returns most of the revenue from emissions trading or tax to the citizens.

▸ The subsidies

Making fossil energy and exhaust emissions more expensive is only half the battle. In order for people to switch to environmentally friendly vehicles and retrofit building heating systems, their acquisition costs must fall. This can be achieved, for example, with a higher government subsidy for the purchase of an electric car, as proposed by the SPD.

The CSU’s climate paper states that citizens could receive an additional tax write-off of up to 10,000 euros per year. For example, someone who buys an energy-saving washing machine for 700 euros might get an extra 50 euros from the state. Vice chairman of the CDU/CSU parliamentary group Georg Nublein also proposes higher tax write-offs that would make it easier for property owners to invest in modern heating technology without having to pass it on to tenants in full. Companies could also take advantage of such benefits when they renovate their company buildings.

▸ The climate bond

A great deal of money is now at stake when the CDU/CSU and SPD talk about climate protection over the next ten years. Grants, tax write-offs, investments – there is talk of 30, 50 or even 150 billion euros. However, these wishes are being met by an economy that is currently flagging. It will therefore probably not be so easy to find the money in the federal budget.

Hence the idea that, for example, the public KfW banking group or a state foundation could issue a climate bond with a term of ten years, and citizens could buy these securities and thus provide the state with the capital it needs. In return, they could receive interest of perhaps 2 percent annually – more than savings or time deposits and other investments currently yield.

The funds would then be available for programs not funded by immediate state budgets. Some of the billions from the bond could flow as loans to companies for the development of synthetic fuels and hydrogen technology, so that not all transport is dependent on electromobility later on. Expanding the charging station infrastructure for e-cars would also be a sensible measure. After ten years, the public sector would return the money to the investors.

The fact that the state pays reasonable interest in this case could reconcile some citizens with climate policy. Whereas it would currently be cheaper for the federal government to simply sell government bonds for which it does not have to offer interest. But the principle of the CSU, CDU and parts of the SPD to avoid additional debt in the federal budget at all costs speaks against this. The so-called black zero is sacred. To achieve this, they even accept the accusation of establishing a shadow budget – outsourced borrowing that is not to be officially counted toward the state’s finances.

Federal Economics Minister Peter Altmaier (CDU) in particular promoted the climate bonds and suggested that a "non-profit citizens’ foundation for climate protection" be set up for this purpose. This is more of a "climate protection brake," says economist Gabriel Felbermayr, president of the Kiel Institute for the World Economy. If the foundation pays the investors 2 percent interest, even though the state can borrow for free, money is wasted and taken away from climate policy. Federal Finance Minister Olaf Scholz (SPD) also reportedly thinks nothing of the project. Whether and how the bond will work remains to be seen.

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