German emissions trading system introduced for heating and transport sectors

The nETS has been designed by the German government to complement the EU's emissions trading system (EU ETS), as it caters for sectors not covered by the EU ETS. The German government wants to ensure that heating and transport emissions are part of its carbon reduction targets under the EU's Effort Sharing Regulation. However, price signals that could provide an incentive to reduce greenhouse gas emissions have been lacking on the market so far, the government said.

All fossil fuels whose combustion produces greenhouse gas emissions fall under the nETS, in particular petrol, diesel, heating oil, liquefied petroleum gas, natural gas and, from 2023, coal. Primarily affected by the nETS are the areas of building heat and transport, but also the manufacturing industry, which already has to participate in the EU ETS.

While the EU ETS focuses on active emissions, the nETS is concerned with the question of when fuels are placed on the market that later, when combusted, lead to greenhouse gas emissions. A major reason for this different approach is that it would be impractical and also disproportionate to charge every single emitter, for example every single car driver, with fees for greenhouse gas emission.

In order to determine the point in time at which the fuel is placed on the market, the law refers to the Energy Tax Act (EnergieStG), which provides that fuels are said to be put on the market when energy taxes are incurred.

By this, a carbon price now also applies to road transport and heating in Germany, borne by the companies that put fuels into circulation. However, it can be assumed that the additional costs will be passed on to customers – this is even envisaged by the German government.

The nETS will be implemented in two steps: in the introductory phase from 2021 to 2025, the CO2 pricing is similar to a tax. There will be as many certificates issued by the government as demanded by emitters. The fixed prices will increase annually, starting with €25 per tonne of CO2 in 2021 to €55 per tonne in 2025.  There will be no absolute limit on the number of certificates. This also applies in the event that the annual emission volume exceeds the existing climate targets within a given trading period.

The certificates will be allocated to the calendar year. In this fixed price phase, they are only valid for covering fuel emissions in this calendar year and the previous year. Therefore, allowances cannot be purchased at cheaper prices in one year and used for emissions in future years, so 'banking' of allowances is impossible.

In the second phase, starting in 2026, the emission certificates will be auctioned. For 2026, a price range with a minimum price of €55 and a maximum price of €65 per emission certificate is envisaged. From 2027 onwards, the price will be decided freely by the market, unless a decision is made in 2025 to continue with a price corridor for 2027. In the auctioning phase, the certificates are in principle valid for every year of the trading period in question.

Distributors in the nETS must deliver emission allowances by 30 September in the year in question. The number of allowances must relate to the level of emissions of the fuels placed on the market in the previous calendar year. If the emission allowances are not delivered or the reporting obligations are not fulfilled on time, the law provides for various sanctions. Among other things, there is a payment obligation for each tonne of carbon placed on the market without allowance. For the first phase, 2021 to 2025, this is twice the allowance price of the year in question. In the second phase of the auctions, the penalty will be €100 for each non-certified tonne of carbon.

In contrast to the EU ETS, there is also no free allocation of certificates to participants in the nETS. However, the German government expects that the additional costs arising from the nETS will be passed on to consumers. This shall encourage the population to reduce their carbon emission so Germany can achieve its climate goal of reducing greenhouse gas emissions by 55% by 2030. The additional revenues from the nETS are to be used in full to relieve the charges on households and businesses for renewable energy.

Overlaps between the EU ETS and the nETS are unavoidable, especially when a fuel within the scope of the BEHG is delivered to and used in a facility that is subject to the EU ETS. Affected companies can reduce their existing levy obligation under the nETS by the quantities of fuel delivered to and used in EU-ETS facilities, in order to avoid a double charge.

A merger of the nETS and the EU ETS seems possible once the market price can form freely in auctions, which might be the case from 2027 onwards. However, a decision on this cannot be expected before 2025.