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Germany may give a form of relief to refiners at risk of
relocating due to the January launch of a national fuel emissions
carbon pricing regime.
It aims to prevent "carbon leakage," or companies trying to
escape the regime's reach by moving operations abroad,
inadvertently creating more emissions in the process.
Using a 31 March draft ordinance, fuel suppliers
operating in Germany that meet strict criteria can receive
compensation for allowances they need to comply with the national
emissions trading system (nETS) under the Fuel Emissions Trading
Act (BEHG).
The nETS covers suppliers of gasoline, diesel oil, heating oil,
liquefied and natural gas used in transport and heating, as well as
certain manufacturers already required to participate in the EU
Emissions Trading Scheme (ETS).
The relief scheme should pass through parliament by the summer.
It is currently under review in the lower chamber of the German
parliament, the Bundestag, specifically by the Commission on
Environment, Nature Conservation, and Nuclear Safety, a German
government spokesperson told IHS Markit.
It will also have to be approved by the European Commission to
ensure it follows state aid rules, possibly by the autumn.
Not just fuel suppliers would get relief. Other companies
eligible for compensation to put towards allowances include some
iron and steel manufacturers, and industrial gas and chemical
producers.
The amount of compensation varies by sector. It ranges between
65% and 95%, with the higher levels of compensation reserved for
companies that reach a certain emissions intensity by 2023, according to a blog by two
Hogan Lovells attorneys in Dusseldorf, Associate Finn Poll-Wolbeck
and Partner Stefan Schroeder.
The new rule would alleviate some of the burden placed on
companies by nETS. Carbon prices have been set at €25/mt ($22/mt)
of emitted carbon, and will gradually increase to €55/mt ($30/mt),
according to the Hogan Lovells attorneys.
While the system is up-and-running with no problems reported,
fuel companies have not yet begun to purchase allowances. "Whereas
affected companies, the 'suppliers' of fuel, have already largely
begun to raise prices for their customers according to the expected
costs for the certificates, the actual purchase of emissions
certificates will largely begin in the second half of the year,"
Poll-Wolbeck told IHS Markit.
So far, the carbon pricing system is not burdensome. Sina
Barragan, a consultant specializing in emissions trading and energy
efficiency with the German sustainability risk management firm
Gallehr+Partner, predicts companies will invest accordingly as
carbon prices rise. "Now, they don't do much, to be honest. It's a
bit far away, so they don't have what is coming up on their minds.
It is a big administrative expense, and that is how they see it,"
Barragan told IHS Markit.
"There might still be carbon leakage if companies get the
leakage aid, because they need to produce offsets to get the aid.
They need to have measures to decarbonize fuel production processes
and improve energy efficiency, so it's not easy to get the carbon
leakage aid," she said. "There is also an emissions intensity
target."
In another recent bill, Germany's Federal Immission Control Act
(FIPA) also encouraged its refiners to supply greener fuel, like
hydrogen, to the aviation and industrial sectors.
Emissions goal
Germany's system is tackling emissions in heating and vehicles,
which have for the large part only been mulled for inclusion in the
much-larger EU ETS.
Cutting emissions for these sectors is expected to put Germany
on the path to reach its 2050 goal for carbon neutrality, set in
2016. Germany is one of only eight nations worldwide that have
already agreed or started to implement such a policy.
Barragan said the scheme will play a part in reducing emissions
in Germany as carbon prices rise. "It's a good thing, because it's
very helpful too, but it is just a part. The prices per ton of
carbon go up linearly from 2021 to 2025, and then it gets even
higher," she said.
But a non-profit group, The Citizens' Climate Lobby Germany,
said the move undermined the purpose of emissions trading in
theory. "In practice ... the federal government now wants to exempt
large parts of the manufacturing industry from the CO2 price.
Depending on the industry, they can continue to emit between 60%
and 95% of their CO2 emissions free of charge," it said in a
statement.
It said the "far too generous" compensation needlessly relieved
industries with low risk of leakage because the carbon price
equaled 0.025% of their gross value as well as those that had no
international competition. It also argued the scheme did not assess
the need for compensation on a company-by-company basis.
Germany's industry cried foul for the opposite reason. "The
limited scope of economic sectors benefitting from the ordinance is
one main point of criticism by the public, whereas environmental
organizations criticize that the intended effect of the fuel
emissions trading system, the price increase carbon dioxide
emissions, and thus the incentive to reduce emissions, is offset by
the payments received under the ordinance," said Poll-Wolbeck.
While the "sector list" benefitting from the ordinance could be
expanded, the current list is based on EU ETS rules, he said.
If the ordinance proves successful, it could prevent the carbon
leakage that might hike emissions for some of Germany's neighbors.
For example, German trucking companies may choose to buy fuel in
Denmark, where it would be cheaper because it does not include the
German carbon price. The Danish tax ministry has already published
estimates for an expected increase in Danish diesel sales.
But carbon leakage may not be a major concern for Germany, as
the EU ETS has only caused minor leakage investments outside the
EU, according to a 2018 study by the federal
environment agency.
Cap-and-trade for refiners
The cap-and-trade system capturing fossil fuel suppliers'
emissions in Germany follows a similar linked system established
between California and Quebec in 2014. China in February launched a
cap-and-trade system for power generators' emissions that might
include petrochemicals and industrial emitters eventually.
The EU, meanwhile, may be expanding its regime alongside the
potential raising of its 2050 emissions ambitions, potentially
involving heating fuel for the first time. "Massive investments in
energy efficiency, new production techniques, and adaptation to
low-carbon fuels will be required to reduce emissions quickly,"
predicted IHS Markit analysts in a recent report.
Posted 20 April 2021 by Cristina Brooks, Senior Journalist, Climate and Sustainability