Carbon pricing: frequently asked questions

1. Where is there already a carbon pricing?

A carbon price as a key instrument of climate policy is a trend worldwide. Only 5 percent of global greenhouse gas emissions in the period 2005 to 2010 were subject to carbon pricing, mainly in the EU Emissions Trading System. By 2018, the coverage of existing and new schemes had increased to 20 percent, in 57 tax and emissions trading schemes at national and sub-national levels. These include California and the Regional Greenhouse Gas Initiative in the Northeast of the USA. In the meantime, even China is considering carbon pricing.

2. Why is comprehensive carbon pricing necessary in Germany?

The price signal in the EU Emissions Trading System only slows down half of Germany's carbon emissions. Not much is happening with the rest. And under the current policy, Germany does not stand a chance to meet its obligations under the EU Effort Sharing Regulation: By 2030, carbon emissions in areas not covered by the EU emissions trading, mainly transport, heating, and agriculture, will have to be 38 percent below 2005 levels; as early as 2021, a limit applies that will be tightened year after year. Because of the foreseeable failure (see figure), a threat of billions of euros in fines and a serious damage to the credibility of EU climate policy are imminent.

Areas outside the EU emissions trading. Including other greenhouse gases (converted to CO2 equivalents). Source: Öko-Institut (2019)

3. What is the advantage compared to funding programmes and regulation?

There are some efforts to limit carbon emissions even in the German transport and heating sectors, for example by implementing vehicle fleet standards at EU level or funding programmes for heating systems. However, no price tag is attached to climate gas, let alone announced future price increases. This gives little incentive to invest in low-emission technologies. Social balance is also not taken into account in regulatory law. Since there is no revenue, as with the carbon price, no compensatory measures can be financed.

4. How can carbon pricing be implemented in practice?

The best framework is the EU emissions trading. However, this requires time-consuming political coordination processes to create the proper framework and European burden distribution and is the perspective for the period starting in 2030 at the latest. Getting on board quickly. An initially national carbon pricing can be implemented through taxation or a separate emissions trading. Both instruments are basically equivalent if they are arranged appropriately. From an administrative perspective, a carbon tax is easier and faster to implement.

5. How high must the carbon price be?

Empirically founded assumptions about “elasticities” – how much a price increase actually slows down the demand for climate-damaging products – make it possible to estimate suitable carbon prices to achieve the pro­mised emission reductions from 2021 to 2030 promised under the EU Effort Sharing Regulation. Determining pathways.  For a carbon tax, a pathway of 50 euros per tonne of CO2 in 2020, increasing gradually to 130 euros by 2030, is appropriate.

6. Why does national emissions trading need minimum and maximum prices?

Not only as a tax, but also as a national emissions trading scheme, carbon pricing should be given a time path with future price increases announced in advance: in order to avoid speculative price fluctuations in emissions trading that would be misleading investors, the system needs a collar of minimum and maximum prices. A collar of 35 to 70 euros (2020) and later 70 to 180 euros (2030) is indicated.

7. Is there also a need for reform in European emissions trading?

In parallel with the national launch, Germany should push ahead with the carbon pricing under the umbrella of the EU emissions trading. A minimum price should be quickly introduced here as well: the system still does not provide a reliable framework for long-term investment. Advances in transport and heating, such as e-mobility and heat pumps, also depend on a rapid decarbonisation of the electricity sector, which is covered by the emissions trading.

8. How can a carbon price be designed in a socially acceptable way?

A carbon price of 130 euros per tonne in 2030 means 37 cents more per litre of fuel and 230 euros more annually for gas heating of an 80-square-metre flat.  But the state can redistribute the revenue as a per-capita refund (“climate dividend”) and reduce other taxes. Climate-friendly action is thus rewarded. On average (see figure) poorer households see relief of approximately one and a half percent of their consumer spending. There is hardly any difference between city and country. For particularly affected groups, such as long-distance commuters, hardship clauses must be considered.

Relief (-)/burden (+) at a carbon price of 130 euros per tonne in 2030 in areas not covered by the EU emissions trade, as a percentage of consumer spending. The number is the average in income deciles No. 1, 5 and 10. The thick bars indicate the medium 50 percent in the respective household group. The thin bars indicate the rest except for statistical outliers (deviation above 1.5 IQA). Household incomes equivalence-weighted. Source: MCC

9. Is there a need for further measures in addition to a carbon price?

Carbon pricing should be the central instrument of climate policy. However, complementary measures make sense. In the heating sector, these include information programmes or tax incentives or funding programmes for the building renovation. In the transport sector, the infrastructure for e-mobility, public local and long-distance transport should be expanded and the framework conditions for intelligent freight transport provided. Consumer myopia can be overcome, for example, with efficiency standards and bonus-malus systems. Moreover, the historically uncontrolled growth of taxes and levies in the transport and heating sectors in Germany should be corrected and an energy tax reform tackled.

10. How can the competitiveness of the economy be maintained?

As long as other countries do not pursue an ambitious climate policy, German policymakers must first take a pragmatic approach in case of doubt. For example, companies in the transport and heating sectors could initially continue to receive energy tax exemptions within the carbon pricing reform. At the same time, political efforts should be made to ensure that other countries also introduce carbon pricing in order to create a level playing field internationally.