The Energiewende country Germany faces yet another policy conundrum: Almost all researchers, industry and environmental lobbies and many politicians across party lines agree that Germany needs to put a price on greenhouse gas emissions for all sectors, to bring the country back on track to meet its climate targets and kick-start the next phase of the energy transition. Yet whether 2019 will bring the introduction of a CO2 price remains far from certain as doubts about the government’s ability to push through such a far-reaching reform linger.

If Germany wants to avoid failing its climate targets and paying billions to offset excess emissions, it needs new policies to make sure that all sectors – particularly the transport and buildings sectors – become more climate friendly – and fast. This conclusion, heard from government representatives and seen in official energy transition reports is part of the raison d'être for a new climate action law, due to be decided in 2019.

The policy instrument of choice to ensure that all sectors contribute more to greenhouse gas reductions is a CO2-pricing scheme that limits the use of energy and materials with high climate-damaging carbon emissions. On this, researchers, civil society groups, industry representatives and most politicians agree. A suggestion of this sort will also likely be part of the advice from Germany’s coal exit commission, according to a draft report.

Germany will ultimately need a price on greenhouse gas emissions across all sectors that does not overburden citizens with lower incomes in order to complete its energy transition, the country’s environment minister, Svenja Schulze, said in front of energy managers in Berlin in November. Schulze has been pushing for the idea since she took office in March but failed to secure support from other ministers who frequently pointed out that such a scheme wasn’t part of the 2018 coalition treaty.

However, she received further backing by a cover story in one of Germany's most popular weekly magazines. Der Spiegel carried a CO2 price proposal by two think-tanks and research institutes with links across the political spectrum, which aims at making "self-interest a driver for climate action". The authors from MCC/PIK and RWI argue that a carbon price is “the most cost-efficient instrument” to bring down Germany’s emissions.

Looming penalties for excess emissions from transport and heating

Germany, which is pursuing a double exit strategy from nuclear power and fossil fuels, to reach an 80-95 percent greenhouse gas reduction by 2050, is a member of the European Emissions Trading System (EU ETS). A price for CO2 therefore applies in the electricity market, for industrial companies and airlines.

Oil products for driving and heating are not charged depending on their CO2 emissions. These two sectors have done the least to reduce emissions so far. In fact, emissions from the transport sector have increased since 1990.

Germany is therefore facing costs of 30 to 60 billion euros between 2021 and 2030 for not achieving its emission reduction targets under EU effort sharing rules in these sectors. And it is set to fall short of its 2020 greenhouse gas reduction goal by eight percentage points (32 percent instead of 40 percent reduction).

The German government appears to be caught between a rock and a hard place: On the one hand, there is the climate target failure and looming costs, plus a general consensus that a CO2 price would be a good solution to these issues. On the other hand, there is the legislative complexity that a change in taxes and levies or the introduction of a new CO2 trading scheme would entail. And, more importantly, the fear of how voters would react to a rise in fossil fuel prices. "The reaction to increased petrol and heating oil prices in France has taken away a bit of our courage,” Germany’s energy minister Peter Altmaier (CDU) said in November.

But even before the bloody protests in France, the German government didn’t include a CO2 price option in its 2018 coalition treaty, although a significant change to the way the energy transition was financed ranked high on many industry and climate lobby groups’ wish lists for the new government.

Price or tax? Many options on the table

Views vary about which type of CO2 price, e.g. a tax, a trading scheme, or a carbon floor price would be best for Germany.

„As usual there is no unanimous opinion among researchers but I would say that those of us who have a strong focus on the economic context see a price on CO2, be it via a trading scheme or be it via a tax, as an efficient and preferable instrument,” professor Kai Hufendiek Managing Director of IER - Institute of Energy Economics and Rational Energy Use, University of Stuttgart, told Clean Energy Wire.

There are many advantages to reducing emissions through a price on CO2, Hufendiek says. While set exit dates for certain fossil technologies are very rigid and hard to adjust, the CO2 price promises a more efficient and flexible approach that can ensure emission reductions to take place where they are cheapest and have an effect from the very first day of their introduction.