Source: Euractiv, N. J. Kurmayer

Projections suggest that Germany is likely to emit 150 million tonnes more of CO2-equivalent gases than permitted under EU rules created by the Effort Sharing Regulation, which is expected to result in a fine of up to €30 billion.

The EU’s Effort Sharing Regulation (ESR), which was most recently revised in March, addresses 60% of emissions within the European Union, and is used as a supplementary measure to the emissions trading scheme (ETS I), which primarily covers the industrial and energy sectors.

Under the ESR, the responsibility for climate protection measures is distributed among EU member countries based on their respective economic wealth. The five wealthiest EU nations, including Germany, must reduce their emissions by 50% by 2030. In contrast, less wealthy nations such as Bulgaria have a lower reduction target of 10%.

Germany is projected to fall significantly short of its climate targets in both the building and transportation sectors; it is expected for there to be a deficit of approximately 150 million metric tons of CO2-equivalent gases relative to the ESR targets. If this is the case, Germany will have to purchase emission allowances from other countries to compensate for the shortfall, although the exact price remains yet unknown.

The cost of carbon

Brigitte Knopf, vice-chair of the German climate expert panel, emphasized the importance of fulfilling both national and European climate commitments, as well as acknowledging that these commitments appear to have been ignored by Berlin during the revision of its climate legislation.

In spring, Germany opted to eliminate individual sector-specific climate targets in favour of a comprehensive approach. Despite public statements from senior government officials that climate targets would be reached, experts from the climate panel anticipate an oversupply of more than 200 million tonnes by 2030. While this may lead to legal issues for Berlin, the financial implications associated with failing to reduce CO2-equivalent emissions will come at a price.

In 2022, Germany was forced to acquire 11 million carbon certificates from Bulgaria, Czechia and Hungary for the 2013-2020 period, which were relatively affordable due to their abundance at the time as many countries had a surplus. However, for the 2021-2027 period, the emissions gap between Germany’s target and actual emissions is expected to be 15 times larger. As part of the EU’s “Fit for 55” climate package many countries’ targets are becoming increasingly ambitious, meaning that fewer countries are likely to have significant leftover emission allowances available.

“The price for emission allowances under the EU Climate Change Regulation is basically still completely uncertain,” says Jakob Graichen, a senior expert at the German Öko Institute. Experts anticipate that it will depend on the upcoming EU emissions trading scheme for buildings and transport, potentially reaching prices exceeding €50 per emission allowance, or potentially even several hundred euros.

At a gap of 150 million allowances, the penalty for missing the effort-sharing targets could be substantial: upwards of €7.5 billion at a minimum, although €30 billion could easily be reached.

Ultimately, however, allowance prices are a consequence of bilateral negotiations between EU countries, with the possibility that countries like Bulgaria, for example, may offer allowances to Germany at lower prices.

Should Germany be unable to secure an adequate quantity of emission allowances, especially considering that other EU countries are unlikely to significantly surpass their targets, it raises significant uncertainty. Knopf stressed that the precise outcome remains unclear, but the European Environmental Agency is expected to publish more detailed analyses of EU countries’ ability to meet their effort-sharing goals by late October.