On 28 July 2021, the Carbon Leakage Regulation for Germany’s national ETS (nETS) came into effect following its adoption by the German parliament on 24 June 2021. The regulation introduces a compensation mechanism to minimize the carbon leakage risk for emissions-intensive and trade-exposed sectors under the nETS. It has retroactive effect to coincide with the launch of the nETS on 1 January 2021.

According to the regulation, entities eligible for compensation are those on the carbon leakage list of the EU ETS Phase 4 as well as additional ones in sectors and subsectors which meet certain quantitative or qualitative criteria. These criteria assess the carbon leakage risk of a covered (sub)sector based on a national carbon leakage indicator determined by the (sub)sector’s trade and emission intensities using a method similar to the EU ETS. Total amount of compensation to be paid to eligible entities is estimated at EUR 274 million in 2021 and EUR 330 million in 2022.

The amount of compensation for eligible entities is based on a compensation level per (sub)sector, the amount of annual emissions covered (excluding a deductible of 150 tCO2) and the carbon price under the nETS. The compensation levels vary between 65%-95% depending on the emission intensity of the (sub)sector in the first two compliance years. From 2023 a benchmark approach is applied whereby the compensation levels between 65% and 95% are determined by the most efficient 1o% of the plants in the (sub)sector. If entities cannot provide proof of meeting this benchmark, their compensation levels are reduced to 60%.

Entities that receive compensation are required to invest a certain share of it in climate protection measures such as energy efficiency. This share is set at 50% in 2023 and 2024, and increases to 80% from 2025. In addition, entities must implement an energy management system by 2023.

Since the compensation constitutes state aid, the European Commission must approve the regulation before it can be formally implemented.