From December, a new CO2 price component for German road traffic will come into force via the truck toll. Starting in January, CO2 prices for fuels are also set to rise in the national emissions trading system as a forerunner for the expansion of the EU-ETS to buildings and transport. Overall, consumer prices are expected to rise.

Quest for new revenue sources

Following the ruling of the Federal Constitutional Court Germany is raising its CO2 prices to close the financing gap in the 2024 state budget, including for the Climate and Transformation Fund.

CO2 prices are not only an effective steering instrument for reducing emissions, they are also a fiscal instrument. Generated revenues can be used for in the needed green transformation and for social compensation measures.

Accordingly, more and more countries apply CO2 taxes or emissions trading systems (ETS) to put a price tag on emissions and finance climate projects. Also, Germany uses various such instruments.

Since 2005, German installations for energy generation and energy-intensive industry are covered by the EU-ETS. Also, intra-European air and, from 2024, sea transport fall under this emissions trading.

The ETS is a key pillar for achieving European climate targets. However, there are still considerable gaps in reducing emissions by 55% in 2030 from 1990 levels. Progress in reducing emissions is particularly slow in the building and transport sectors.

CO2 prices in transport and buildings

As major emission sources in Germany, emissions from road transport and heat generation for buildings have been priced by various instruments since 2021.

New CO2 levy via truck toll

Starting this December, a CO2 price component is added for freight transport. To this end, a CO2 surcharge of 200 EUR/tCO2 will be included in the truck toll:

1. Levy to be paid: Depending on the emission class of the truck, CO2 charges range between 4 and 16 cents per kilometer.
2. Journeys covered: The toll is levied on journeys driven on German motorways and federal highways.
3. Vehicles covered: For the time being, the toll applies to vehicles over 7.5 t.  From July 2024, it will be extended to smaller vans over 3.5 t. Journeys by craft businesses will remain exempt.

With this addition, toll rates will reflect CO2 emissions in addition to infrastructure costs, air and noise pollution. Revenues from the toll are to be used for improvements to the highway and rail infrastructure.

The CO2 levy is intended to incentivize the switch to low-carbon vehicles. Representatives of the freight and logistics industry had strongly criticized the addition of the CO2 levy to the toll, partly due to the current lack of low-carbon alternatives.

The expansion of the toll to include a CO2 component was already announced in the coalition agreement. It was adopted in the fall with the amendment to the Federal Trunk Road Toll Act building on new EU rules. The amended Eurovignette Directive is to be implemented in all EU countries.

In October, the EU environment ministers also agreed on stricter emission standards for heavy goods vehicles. Accordingly, CO2 emissions from these vehicles are to be reduced by 45% between 2019 and 2030 instead of the previously planned 30%. The EU Parliament backed this proposal in November.

Increasing CO2 levy for fuels from 2024

In addition, from January 1, 2024, CO2 prices for fuels in the transport and building sectors as well as small industry are to increase via Germany’s national emissions trading scheme (nEHS).

In the agreed measures for the 2024 state budget, Germany has also set CO2 prices to rise from the current 30 EUR/tCO2 to 45 EUR/tCO2 in 2024. Before, an increase to 40 EUR/tCO2 was planned. This rise will make refueling and heating more expensive, depending on the CO2 intensity of the fuels used:

1. Transport: The nEHS covers all fossil fuels that are circulated via filling stations. CO2 costs are set to rise to ca. 12.9 cents/l for petrol and 14.4 cents/l for diesel (incl. VAT).
2. Buildings: Fossil fuels (and from 2024 waste) used to generate heat are also subject to the nEHS. Here CO2 costs will increase to ca. 1 cent/kWh for natural gas and 14.4 cent/l for heating oil (incl. VAT).  

With the budget agreement these CO2 prices are planned to rise to 55 EUR/tCO2 in 2025. The nEHS was launched in 2021 with a fixed price phase and a starting price of 25 EUR/tCO2.

In 2026 starts an auction phase with a price corridor of 55-65 EUR/tCO2. From 2027, the EU ETS II is due to replace the nEHS.

Transition to the EU ETS II from 2027

As part of the ETS reform the EU is going to introduce a second emissions trading scheme (ETS II) for fuels. The amendment to the EU ETS Directive aims at reducing emissions in the transport and building sectors as well as in small industry by 42% compared to 2005.

In contrast to the current fixed price system in the nEHS, prices in the ETS II are determined by the free interplay of supply and demand. While the EU is aiming to stabilize prices at around 45 EUR/tCO2, prices could ultimately be significantly higher. Experts from Agora Energiewende expect prices of up to 200 EUR/tCO2.

As early as 2025, fuel traders will have to start monitoring and reporting emissions under ETS II. Germany is well positioned due to comparable rules in the nEHS. Yet there is not yet a concept for a smooth transition from the nEHS to ETS II.

GHG premiums for electric vehicles since 2022

In addition, in 2022 a CO2-based premium for electric vehicles was introduced in Germany with the adjustment of the greenhouse gas reduction quota (GHG-quota) to provide further incentives for reducing emissions in road traffic.

Upon registration, private owners of e-cars can have emission reductions certified and sell them to fuel producers. Intermediaries offer different price models. Premiums have recently been around 250 EUR/tCO2.

Fuel producers can count these certificates against their GHG quota. These quotas set a minimum share of climate-friendly fuels based on the EU Renewable Energy Directive (RED II).

A wide range of players affected

These different instruments in the transport and building sectors in Germany show a patchwork of carbon pricing. Different prices are charged per ton of CO2, so that a central steering remains difficult.

While the truck toll applies to companies in the logistics and freight industry or with own transport fleets, various players are affected by CO2 prices via the nEHS or ETS II:

1. Companies in the energy, manufacturing and construction industry with vehicle fleets and/or small combustion plants with a capacity of up to 20 MW
2. Commercial enterprises and public authorities with vehicle fleets and workplaces with fossil heat supply
3. Private households with cars and residential buildings with fossil heat supply

Households do not participate directly in the emissions trading under the nEHS or ETS II. The CO2 costs are passed on to them by fuel traders. This also gives households an incentive to reduce their consumption of fossil fuels.

Corporates and households share the burden of increasing CO2 prices very differently. On the one hand, companies are currently reimbursed for a large proportion of the nEHS costs. Under the BEHG Carbon Leakage Ordinance they can apply for compensation payments to avoid disadvantages in international competition.

On the other hand, it is to be expected that companies will pass on the increasing CO2 costs from truck tolls and the nEHS or ETS II to end users. In the long-term consumer prices are set to rise.

Such financial burdens will pose a challenge for financially weaker households. There are increasing calls for the revenues from CO2 prices to be used for social compensation.

Consequently, the ETS reform goes hand in hand with the creation of a EU climate social fund to support households and companies through temporary direct income subsidies for decarbonization measures and investments.

And in Germany, too, a Klimageld is to be introduced to avoid social imbalances resulting from the increased prices in the nEHS. Even though this was already announced in the coalition agreement, concrete plans are still missing.

(this blog is frequently updated – last update January 2, 2024)

Sources and further information:

• Agora: The CO2 Price for Buildings and Transport
• Federal Office of Logistics and Mobility: Amendment of Toll Regulations
• German Federal Government: Climate Protection in Freight Transport
• German Federal Government: CO2 Price Increase to 45 Euro per Tonne
• German Emissions Trading Authority: National Emissions Trading System   
• EU Commission: ETS 2 – Buildings, Road Transport and Additional Sectors
• Toll Collect: CO₂ and 3.5 Tonne Toll

Photo by Sven Brandsma on Unsplash