Climate Policy

The energy sector is the largest contributor to greenhouse gas emissions caused by humans, both in Germany and globally, which is why the energy transition is becoming the most important social project currently facing Germany and the European Union. Opinion is divided regarding the most effective policy instruments for efficient climate protection and the costs of the energy transition.  

Putting a Price on Greenhouse Gases

Economists have been advocating the introduction of a price on CO₂ for years. Designed to apply equally to all technologies, it would provide incentives to curb greenhouse gas emissions in those areas where doing so would cost the least. There are currently various levies that determine the price of carbon dioxide emissions in Germany. However, the lack of a systematic approach has so far failed to provide the necessary incentives for the efficient reduction of emissions in almost all sectors. The eco-tax on gasoline and diesel, for example, amounts to around EUR 60 per metric ton of CO₂ emitted, whereas the same amount produced by the use of heating oil in private households incurs a charge of only EUR 8. Owing to electricity tax, emission allowances, and Germany’s renewable energy surcharge (EEG surcharge) alone, the eco-tax on electricity amounts to almost EUR 200 per metric ton of CO2. However, to achieve its climate targets, Germany would have to drastically increase its use of green electricity in the heating and transport sectors in the future. The current tax system does not provide the right incentives for this.

The Middle Ground between Emissions Trading and CO₂ Tax: Flexcap

Flexcap, a CO₂ pricing concept developed by ifo, combines the advantages of a CO₂ tax and an emissions trading system, but serves as a more effective solution than either instrument on its own. The architects of the Flexcap concept maintain that an emissions trading system by itself would pass all uncertainties on to companies and consumers in the form of price fluctuations, while a CO₂ tax alone would make it more difficult to achieve volume targets. In Flexcap, the quantity of the certificates to be auctioned depends on the price: more certificates go up for auction when the price is high, fewer when it is low. Both adjustments stabilize the price compared to an emissions trading system with a fixed cap. Flexcap reduces the uncertainty regarding price and quantity while at the same time making it possible to achieve long-term climate targets.

Major Social Projects Come at a Price

The price tag for the energy transition has been calculated for several scenarios. By 2050, systemic extra costs for the energy transition could total anywhere from EUR 500 billion to more than EUR 3,000 billion, depending on the conditions. That is equivalent to 0.4 to 2.5 percent of Germany’s gross domestic product in 2018. These extra costs seem astronomical today, but their magnitude is similar to that of other major social projects, such as reunification. How such large-scale projects are reflected in value added and employment depends – as was the case with German reunification – to a large extent on the conditions set by policy.