Apart from climate change deniers, no one else is indifferent as to where climate change is heading. Experts and a growing number of citizens agree that it is high time we stopped climate change. Recently, the German federal government announced a climate package aimed at achieving Germany’s climate targets. However, the advisory committee of experts led by Prof. Dr. Ottmar Edenhofer, Director of the Mercator Foundation (MCC) and of the Potsdam Institute for Climate Impact Research (PIK), sees the climate package that has now been drawn up as more likely to jeopardize Germany’s climate targets rather than aid them. Incidentally, the committee had devised an action plan in advance on behalf of the German chancellor. The plan was presented to the cabinet for approval in July 2019.

A key aspect here is the CO2 tax and emissions trade scheme. Both are currently are being discussed a lot in the public arena and amongst the political parties. Although, pragmatically speaking, it is quite irrelevant how CO2 taxation takes shape. The main thing is that it is taking shape. That is the unanimous opinion of the experts at least.

Dividend: Anyone who behaves in a carbon-neutral way ought to get their money back

After all, in principle it is only a matter of being able to present CO2 emissions across a wide range of areas in an economic sense. From electricity and transport to consumer goods. Only in this way will industry and consumers consciously behave in such a manner that less CO2 is produced. Many citizens are not enthusiastic about the idea of an additional tax in the first place. As they fear that everything will just become more expensive. This is the area where politicians are more afraid of losing votes. Brigitte Knopf, Secretary General of the Mercator Research Institute on Global Commons and Climate Change (MCC), placates the discussion:

“Not to worry. The goal is not merely to make everything more expensive. Our proposal includes compensations for the CO2 price that are socially just. This can be done either by means of a climate dividend, as has been done in Switzerland. Or by partially financing the EEG Tariff* with it, so that the price of electricity is lowered.”

This means that those who act in a climate conscious manner will have more money in their pockets at the end of the day. The principle could work as follows: first of all, there is the matter of the climate tax. Which everyone must pay according to their behavior. Those who act in a more climate-neutral way pay less. For example, by cycling a lot or not flying. After a certain time, let’s say one year, the money collected from the climate tax is paid out in an equitable amount as a dividend to every citizen. So those who have acted in a climate neutral way will have more money left over. But this government package does not provide for a climate dividend. The government could and should already create the administrative conditions necessary to offset the CO2 tax. Via health insurance, for instance.

CO2 tax is too low

However, a climate dividend only makes sense if the CO2 tax is high enough. But this is exactly where the committee sees a few tricky issues:

“First of all, looking on the bright side: in principle, the German government has followed our proposal and plans to introduce a fixed price for non-ETS sectors.** Plenty of people are definitely unaware that we have already been paying a CO2 tax on electricity, energy-intensive industries and air traffic since 2005. In the medium term there should be a national emissions trading scheme for both heating and transport. And in the long term, a minimum price should be incorporated into the EU emissions trading scheme. Nevertheless, the CO2 price which has now been agreed upon is in the first place much too low to have a knock-on effect. Initially just €10 and then €35 in 2025. For comparison: In our opinion, a price of €46 in 2020 and €120/tCO2 for the year 2030 would be more effective,” Knopf points out,

©MCC/PIK

… and she adds:

“The problem is the longer that the increase in CO2 prices is postponed, the higher the prices will have to rise each year in order to meet the set EU targets. And it is precisely this that will present us with much greater challenges at a later stage. Namely the need for social equity and greater planning certainty for investments.”

And last but not least, the German government is relying on the purchase of emission certificates from other EU countries. But for one thing, no one knows whether certificates will be available at all nor how the prices of these certificates will change.

Social equity virtually impossible to implement

Admittedly, in the beginning, the additional burden on medium income households will not be felt due to the low prices. But this will change over the long term. Therefore, a further point of criticism is that the current climate package will weigh most heavily on low and middle-income households in the future.

“Since the focus is on energy and as low-income households spend a particularly large proportion of their income on energy, low and middle-income households will be hit hardest in percentage terms if there are no compensations. According to our calculations, measures such as: reducing the electricity price, raising the housing allowance and adjusting the reimbursement of heating costs for people on benefits – are far less effective than a climate dividend. Otherwise the electricity price should be reduced even more than planned. Especially since, according to our calculations, the bottom line is that high earners are charged less than the middle class in terms of percentages. And a large proportion of low-income earners – who do not receive social assistance or housing subsidies and who do not benefit from the relief measures in question – are in fact even more severely penalized by the climate policy.

©MCC/PIK

About a quarter of households in the lowest income group will pay more than 1% of their income as a result of the government’s proposal. The flat-rate commuter allowance is also proving to be unfair. This is due to the tax advantage for high-income earners. The additional relief measure in the package aimed at increasing the flat-rate commuter allowance for long-distance commuters does not help those with lower incomes. The committee also finds it difficult to assess the impact of the allocation of the subsidy programs and measures in the construction and transport sectors. Especially since tax advantages are more likely to be used by high-income earners. For example, the experts fear that the adopted measures will be a social catastrophe in the medium to long term as CO2 prices rise. There is no broad-based compensation mechanism in place that would specifically benefit low and average earners.

Germany should now take action with respect to the EU

Experts also do not consider the still rather cautious package of measures by the Germans with respect to the EU to be the right approach:

“Now that the planned greater reduction of emissions by 50 % or even 55 % by 2030 has created momentum on a European level, it seems like the right time to take action. As a window of opportunity has now been opened for well-timed reforms. The German government should use this time to actively promote a comprehensive European emissions trading scheme,” Knopf urges.

This would also make it possible to determine whether the establishment of a national emissions trading scheme could be dispensed with and if European implementation of one could take place at the same time. Precisely as an EU-wide solution would be the right approach:

“The German approach should be coordinated with similar concepts in other EU member states well in advance. In order to avoid a growing patchwork of incompatible national strategies. We also definitely need a minimum price in EU emissions trading in order to provide a regulatory framework for investments in technologies which emit less CO2,” says Knopf. And right now. Otherwise barely anyone will dare to invest in the future.”

Monitoring should be much stricter

Last but not least, the advisory committee of Experts considers the control mechanisms exercised by independent bodies to be too weak. Knopf points out:

“At the moment, only ex-post monitoring of the measures by a panel of experts is planned. However, the committee should also have the right of initiative for supplementary taxes for the climate targets (ex-ante evaluation of alternative options). A good example is the UK Committee on Climate Change, which has a high priority for climate policy in the UK. Its mandate is to evaluate and monitor progress on emission reductions. And to report on the projected remaining CO2 budgets for fixed five-year terms. The committee also carries out independent analyses in the fields of climate science, economics and politics and makes concrete recommendations for emission reduction targets in the form of future five-year budgets on this basis. The government, in turn, is legally obliged to respond to these annual reports.”

*EEG Tariff 

**Background: while the ETS sectors covered by the EU Emissions Trading Scheme include electricity generation and parts of industry, whereas other sectors such as households, transport, agriculture, etc. are considered as non-ETS sectors.