The national carbon emissions trading system, introduced by the German Combustibles Emissions Trading Act (Brennstoffemissionshandelsgesetz or BEHG), entered into force in 2021 and complements the European emissions trading system (EU ETS), which has been in place since 2005. While the EU ETS applies in particular to large industrial facilities and power plants, the BEHG created a similar cap-and-trade system most notably for the heating and transport sectors. All “suppliers” of combustibles like petrol fuel, diesel oil, heating oil, liquified and natural gas are subject to the trading system introduced by the BEHG in Germany, as far as they are not already covered by the EU ETS. In a first amendment to the BEHG dated October 2020, the certificate price per metric ton of emitted carbon dioxide was set at € 25,-. This price will be gradually increased up to € 55,-.
The Carbon Leakage Ordinance aims at providing financial relief for the affected companies without compromising the climate goals of the BEHG. On the fine line between the intended increase of the costs for using fossil fuels on the one hand and the unintended flight of affected companies to third countries, the federal government’s ordinance dated 31 March 2021 (upon its approval by the German parliament) creates a mechanism of compensation payments for affected companies under certain circumstances. (In particular in light of this compensation mechanism, the ordinance will also have to be approved by the European Commission).
As a first condition for the compensation payments, the companies (or at least independent parts of the company) must belong to a limited number of economic sectors or sub-sectors set out in the ordinance. In addition, the companies have to comply with certain climate-friendly investment obligations in return for the compensation payments.
Regarding the sectorial classification, the government decided to pursue a two-pronged approach. In a first step, companies only qualify for payments if they operate in economic sectors or sub-sectors that are subject to an elevated risk of carbon leakage as determined by the relevant rules of the EU ETS. (On the EU level, this risk is mitigated by a free allocation of certificates). This list of “entitled” sectors in the EU framework is based on quantitative criteria, in particular the trading and emissions intensity of the individual (sub-)sectors and the risk of carbon leakage deriving from them. The list contains, among many others, sectors like the manufacturing of refined petroleum products, manufacturing of basic iron, steel and ferro-alloys, the manufacturing of industrial gases as well as numerous processes of the chemical industry, and was adopted for the national German framework in almost identical form. In a second step, further sectors and sub-sectors may be added to the list on a case-by-case basis upon application by a group of companies or sectorial interest groups and a subsequent decision by the German Federal Ministry for the Environment in coordination with other ministries.
The second condition for obtaining compensation payments pursuant to the ordinance is that the companies prove the prior implementation of certain climate protection measures and investments “in return” for the received payments. Starting in 2023 at the latest, companies (with some modifications for smaller companies) have to implement a certified energy management system that shall, inter alia, identify potential measures to improve energy efficiency and evaluate the economic viability of such measures. In order to receive compensation payments, starting in 2023 companies must invest at least 50%, and starting in 2025 at least 80% of the payments received in the previous year in such measures identified by the energy management system. However, this rule does not apply if, in a given year, no economically viable measures were identified. In this case, the compensation payments may be received without the relevant investments. Under certain additional circumstances, companies may alternatively invest in measures to decarbonize their production processes.
The amount of compensation payments which can be claimed by a company is calculated as the product of the relevant volume of emissions, the certificate price applicable in the relevant year, and the so-called “grade of compensation”. The grade of compensation is defined in the ordinance for each sector and varies between 65% and 95%. Starting in 2023, this grade of compensation will only be applied, however, for companies surpassing a certain emissions intensity threshold (i.e. the volume of emitted carbon dioxide per Euro of gross value added) equally defined in the ordinance for each (sub-)sector. If the threshold is not met, as of 2023, the compensation grade will be 60%.
In light of the significant financial relief promised by the ordinance for companies affected by the national emissions trading system, companies should carefully evaluate their potential entitlement for claims of compensation payments under the Carbon Leakage Ordinance. The relevant applications must be submitted to the German Environmental Agency at the beginning of each calendar year for payments concerning the prior year.
Authored by Stefan Schröder and Finn Poll-Wolbeck.