Fight against CO2 emissions: What’s the point of a CO2 tax?

Emissions of 762 million metric tons of greenhouse gases have been calculated for Germany for 2021. This means that the country will once again fail to meet its self-imposed target of reducing CO₂ emissions by 40 percent compared with 1990. The reduction amounts to only 38.7 percent. The energy sector in particular was responsible for the 4.5 percent increase in emissions compared with 2020. The increased demand for electricity could not be offset by renewable energies due to poor weather conditions. As a result, electricity generation from wind energy was lower than in previous years.

To still achieve the target of a 65 percent reduction in emissions in 2030, one of the German government's core objectives is to expand renewables. The aim is to achieve an 80 percent share of electricity generation. In purely arithmetical terms, the reduction in emissions would have to average 6 percent a year from now on. To achieve this, the energy turnaround in the building and transport sectors is to be driven forward. According to Economics Minister Habeck, 15 million e-cars are to be registered by the end of 2030.

In 2021, the previous German government introduced a CO₂ levy to encourage consumers to cut CO₂ emissions. The idea behind this was that particularly climate-damaging sectors such as the transport sector would have to pay a levy per ton of CO₂ by purchasing a certificate. The money would go into the Energy and Climate Fund (EKF) to promote the energy transition. By making gas, heating oil and fuels more expensive in 2021, the aim was to encourage companies and consumers to save money and promote e-mobility in Germany, for example. The CO₂ tax system in Germany exists parallel to the European Emissions Trading System (ETS). With the ETS, the EU has been trying since 2005 to make it attractive for companies in the energy, aviation, and energy-intensive industry sectors to cut emissions.

But how does emissions certificate trading work? In general, an allowance represents permission to emit a certain amount of a fuel over a limited period. At the end of this period, an actor must prove that no more emissions were emitted than authorized by corresponding certificates. It is important that the number of these certificates is regulated by a central body and reduced at certain intervals. For example, the number of certificates issued annually in the EU in 2013 accounted to 2,084 million. By 2020, this number had fallen by 1.74 percent annually and is still reduced by 2.2 percent since 2021. A reduction in the supply entails an increase in the price of allowances, which means that companies must either pay more or reduce their emissions accordingly.

The aim is to prevent circumvention of the ETS by shifting production to other EU countries through the so-called "Carbon Border Adjustment Mechanism". Under this mechanism, levies are imposed on imported goods produced in other EU countries with emissions of climate-damaging pollutants. These regulations are to apply from 2026 to imports of electricity, aluminum, iron, steel, cement, and fertilizers into the EU. The aim is to maintain the competitiveness of climate-friendly production within the European Union.

However, critics have pointed out in recent years that too many emission certificates have been put into circulation, so that the mechanism has hardly been effective. The jump in the price of certificates in 2021 can also be justified by the attractiveness of EU emissions trading as an investment for speculators. According to consumer protection associations, the introduction of the CO₂ levy in Germany, although set at a low level, has primarily led to a financial burden on consumers who are at risk of poverty. This could be mitigated by counter-regulatory measures. To fulfil the Paris climate targets by 2045, climate researchers are calling for the CO₂ price to be raised to over 120 euros/ton by 2030. In Germany, the price is currently 25 euros and is set to rise to 55 euros by 2025. In Sweden, in comparison, it is currently 122 euros/ton. The country has been able to reduce its emissions by 26 percent over the past 5 years.

Sources

Tagesschau.de (3/15/2022):

https://www.tagesschau.de/inland/treibhausgase-deutschland-klimaziel-101.html, accessed: 3/16/2022 at 12:10 p.m.

pv-magazine, article by Sandra Enkhardt (3/15/2022):

https://www.pv-magazine.de/2022/03/15/deutlicher-anstieg-der-co2-emissionen-2021-umfangreiches-sofortprogramm-angekuendigt/, accessed: 3/16/2022 at 11:45 a.m.

https://ec.europa.eu/commission/presscorner/detail/en/qanda_21_3661, accessed: 3/16/2022 at 12:10 p.m.

Wikipedia, „EU-Emissionshandel“:

https://de.wikipedia.org/wiki/EU-Emissionshandel, accessed: 3/17/2022 at 9:30 a.m.

Mdr.de, article by Carolin Voigt (12/20/2021):

https://www.mdr.de/nachrichten/deutschland/wirtschaft/folgen-co-zwei-abgabe-verbraucher-benzin-heizung-100.html, accessed: 3/17/2022 at 10 a.m.