An overview of the current debate

The idea of a carbon tax is not new. Several European countries like Sweden, Denmark, Finland, Ireland and France, have already introduced a tax on carbon as a tool to cut emissions. In Germany, the carbon tax has not been part of the political debate in the past. However, this has changed recently. In the last couple of weeks, the carbon tax has dominated Germany’s political agenda.

Germany is under pressure to implement climate protection especially in the transport and building sectors following a government report released in March 2018. The report shows that Germany will almost certainly fall short of the 2020 Climate targets.

The Federal government aims to cut emissions by 40 percent by 2020, by at least 55 percent by 2030 and by up to 95 percent in 2050. On the current trajectory, Germany will miss its 2020 climate target by about 8 per cent and will have to buy non-ETS emission allowances from European partner countries that exceed their own climate goals.

A carbon tax is now being discussed as one possibility to help Germany achieve its Nationally Determined Contribution under the Paris Agreement.

Background: The current situation in Germany

Like all member states of the European Union, Germany currently participates in the EU Emissions Trading System (EU ETS) that was introduced in 2005 as a cap-and-trade approach to reducing carbon dioxide emissions from power stations, energy-intensive industries and civil aviation. While it has been argued, that EU ETS failed to sufficiently incentivize emitters to reduce their carbon footprint due to a surplus of available allowances, it is still noteworthy that the power sector in particular has made considerable progress.

The share of renewable energy in Germany, for example, has increased from 3.4% in 1990 to nearly 38% in 2018. Reforms of the system have led to increasing prices for emissions allowances, lately.

Focus on the heating and transport sectors

However, not all energy-intensive sectors are included in the EU ETS. The current debate mainly focuses on the transport and building sectors and on how carbon efficiency in these sectors can be improved. There is a consensus, that a price on carbon could help to reduce greenhouse gas emissions in the heating and transport sector and encourage investments in low-carbon technology. Basically, there are two different possibilities to put a price on carbon.

One option would be to expand the EU ETS to include the two sectors in question. However, it has been argued that this would require a multinational solution in the form of a European alliance of states – a process with very limited prospects of providing a quick solution.

The carbon tax

Against this background, environmental minister Svenja Schulze (SPD) pushed for a carbon tax for non-ETS sectors and kick-started the current debate. The basic idea of the tax is to make fossil fuels increasingly more expensive to trigger investments in energy-efficiency measures and switch to non-fossil fuel technologies. Advocates of the carbon tax argue that it could help to increase carbon efficiency, particularly in the transport sector. Germany has not been able to diminish its transport sector emissions at all since 1990. In fact, they are today about 1 per cent above the reference level.

 

Support and Opposition

The proponents of carbon taxation in Germany have received support from various sides including research institutions and think tanks, but also the Federation of German Industries and the Fridays for Future movement.

Nonetheless, political opinion is not clear. Representatives from the Christian Democratic Union, the country’s strongest government party – are concerned about possible financial hardships for households or competitive disadvantages for the German industry. They plead for an expansion of the EU ETS to non-ETS sectors like transport and building. The party’s association for small and medium-sized businesses for example argues, that the emissions trading system is the best solution as it favors the implementation of the most efficient reduction technologies available.


The Swiss Example:

Questions to Urs Brodmann, CEO First Climate (Switzerland) AG, about experiences with carbon taxation in Switzerland

What is your perspective on the current debate about the possible introduction of a carbon tax in Germany?

Urs Brodmann: Overall, it seems to me that the discussion is taking place in a heated environment that is still very much influenced by the yellow-west protest in France. The riot-like demonstrations were sparked by the increase of the existing tax. It is different here in Switzerland, where a tax on fossil heating fuels has been charged since 2008 and, is today widely accepted throughout society.

 

What were the key factors for gaining this public acceptance?

Urs Brodmann: The Swiss carbon tax was originally designed as a levy (Lenkungsabgabe) with proceeds re-distributed in full. 50% are distributed to households on a per capita basis through a reduction of health insure premiums, and the other 50% to businesses through a reduction of social security costs. As a result, households with a relatively low consumption of heating fuels actually benefit from the tax.

Since 2010, one third of the tax proceeds are earmarked for supporting energy efficiency improvements in the building sector. This helped to further increase the overall effectiveness of the tax and gain acceptance by real estate owners.

 

Doesn’t the tax harm energy-intensive businesses?

Urs Brodmann: Energy-intensive businesses are exempted from this levy if they accept own CO2 reduction targets or participate in the Swiss emissions trading system. These CO2 targets typically include measures that payback within the first four years and thus help to further strengthen competitiveness.

 

Why were transport fuels such as diesel and gasoline exempted from the tax?

Urs Brodmann: A special regulation applies to companies that sell and deliver fossil fuels. They are obliged to compensate for an annually increasing share of CO2 emissions resulting from the combustion of the delivered fuels through emission reduction projects. So far, this must be done through climate protection projects which are based in Switzerland. However, at the beginning of 2021, international emission reduction projects will also be accepted. The Swiss climate policy system in other words includes different elements for different sectors of the economy: carbon taxation, emissions trading among large emitters, and project-based offsetting.

 

One of the central aspects currently being debated is the question of monetization and what price should be set per ton of carbon. Proposed prices vary between 20 and 180 Euros per ton. What is the price in Switzerland?

Urs Brodmann: The tax currently amounts to CHF 96 [approx. 86 Euros] per ton. It started at a much lower level of 12 CHF in 2008 and was then gradually increased as a function of the development of emissions. The CO2 law sets an upper limit for the tax of currently 120 CHF.

 

Is the Swiss Carbon Tax fit for the Paris World?

Urs Brodmann: A revision of the Swiss CO2 Law is currently being debated in Parliament. However, it is already clear that the main elements of the current law – carbon levy on heating fuels, exemption options for businesses, and offsetting for transport fuels along with vehicle efficiency standards – will be maintained and strengthened by allowing for a further increase of carbon prices in all sectors. Personally, I am convinced that the Swiss mix of climate policy instruments has proven successful and is fit for bringing Switzerland en-route towards net zero emissions, even if emissions from some difficult sectors such as agriculture and aviation remain to be tackled at a meaning full scale.