Renewable Energies Act and International Competition: Is the Special Compensation Scheme Sustainable?

The Renewable Energies Act (EEG) levy shares the costs of financing the feed-in of green energy amongst electricity consumers. To counteract any negative impact on the international competitiveness of German companies, the EEG special compensation scheme exempts electricity-intensive companies from the EEG levy. In December 2013 the EU initiated a state aid investigation into this German policy. The investigation should verify whether the special compensation scheme can be classified as appropriate. This would be the case if the scheme prevents carbon leakage, or the transfer of emissions to other countries. In an expert report for the German Federal Ministry of Economics and Energy the Ifo Institute proposes measures to assess the leakage risk faced by individual branches. Ifo’s analysis shows that sectors producing goods whose prices heavily influence demand for them would be deeply affected by the migration of emissions and value creation abroad, especially in the metals, paper and steel industries. Even if competition-intensity measures are used, it remains questionable whether the resulting distortions are justifiable and whether a far-reaching reform of the EEG is not required.