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Germany reforms national ETS to broaden scope and postpone price increase

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On 16 November 2022, key amendments to the German national ETS came into force.  The German Parliament agreed to postpone the increase in the CO2 price under its national ETS by one year in the context of the current energy crisis. It further adopted regulations broadening the scope of the national system to include coal-derived fuels from 2023 and waste-derived fuels from 2024.

Price increase postponed to 2024

The German national ETS currently puts a fixed CO2 price on fuels used in the buildings and transport sectors in Germany. The amendment law of the “German Fuel Emissions Trading Act”, that came into force following its adoption by the German Parliament on 28 October 2022, postpones the planned EUR 5 increase in the CO2 price from 2023 to 2024.

According to the previous pricing rules, adopted in October 2020, the CO2 price was set to increase each year from 2021 to 2025, before transitioning to auctioning in 2026. The fixed price started at 25 EUR in 2021 and increased to EUR 30 in 2022. It was then set to reach EUR 35 in 2023, which is now postponed to 1 January 2024. The planned price increase for the following year will also be postponed, so that the price will reach EUR 45 in 2025, instead of EUR 55 as originally planned. The amendment, however, does not change the start of the auctioning phase, which is still planned for 2026.

The new pricing rules come in the context of the of the ongoing energy price crisis in Europe and the broad relief measures implemented by the German government to support consumers. The government thereby intends to restrict the additional cost burden on households stemming from the carbon price over the next three years.

Scope extended to include coal-derived and waste-derived fuels

The amendment law also sets the regulations for coal-derived fuels to be brought into the national ETS from 1 January 2023 and waste-derived fuels from 1 January 2024. The national ETS will thereby cover small coal power plants below a capacity of 20 megawatts, as well as waste incineration plants, neither of which are currently covered by the EU ETS. Germany's national ETS started with a limited scope in 2021, covering fuel oil, LPG, natural gas, petrol, and diesel used in the buildings and transport sectors. With the inclusion of coal and waste, the scheme will cover all existing fuels from 2024.

The German national ETS will be the first system in Europe to cover fuels derived from waste. According to a study commissioned by the German government, this measure would affect about one hundred waste incineration plants in Germany, which incinerate 26 million tons of waste annually to generate electricity and heat. The plants incinerate residual household waste that is left over after plastic packaging, metal, paper, glass, and organic waste are collected and treated separately. In addition, the system will also cover landfill gas plants and used oil refining plants. The government argues that including these plants in the national ETS will create a level playing field with other power plants that generate electricity and heat and already face a price for their CO2 emissions.

Since 2021, the German national ETS has complemented the EU ETS by putting a CO2 price on fuels not otherwise covered by the EU’s system. In 2020, the European Commission proposed to extend carbon pricing to the buildings and road transport sectors, and to include waste incineration plants from 2026. Depending on the exact scope, the new EU system could then supersede the German ETS. However, it is still unclear whether the Commission’s proposal will be adopted, as negotiations at the EU level are expected to run at least until the end of December 2022.

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