Germany moving forward in EU-wide auctioning of emissions allowances

In today's decision on the Allocation Act 2012 (Zuteilungsgesetz - ZuG 2012), the German Bundestag has laid the legal bases for the second period of trade with CO2 emissions. An ambitious reduction target will be implemented for the years 2008 to 2012: the number of allowances allocated to installations subject to emissions trading will effectively be reduced by around 8 percent compared to the current level. Compared to the first trading period, the reduction is even over 11 percent. "In Germany and in Europe," said Federal Environment Minister Gabriel, "we have set ambitious targets in climate protection. The Allocation Act 2012 turns our words into actions. Emissions trading will finally become an effective climate protection instrument. It will play a decisive role in ensuring that we meet our climate protection targets for the Kyoto period."

The benchmarking system for energy installations represents a switch to an intelligent allocation system which rewards efficient installations and penalises the polluters. This is significantly speeding up the modernisation process in the German energy industry. There will be no additional benchmark for lignite. Extra allocations amounting to millions for lignite power plants are unwarranted with regard to climate policy and cannot be justified in terms of energy policy. Even without additional allocations, lignite remains fully competitive. This was clearly confirmed not least by a recent study by the Association of German Electricity Supply Companies (VDEW).

The Allocation Act 2012 requires a lower reduction performance from the manufacturing industry than from the energy industry. Drawing this distinction between the sectors takes into account their different competitive circumstances and reduction potential. The consequence is that industry which competes internationally will have to meet an extremely moderate reduction of 1.25 percent. The manufacturing industry must only achieve 1.5 million tonnes of the total reduction in the second trading period of 57 million tonnes CO2. Furthermore, small-scale emitters with less than 25,000 tonnes CO2 per year are completely exempt from reduction obligations. This effectively lifts the burden from small and medium-sized enterprises.

Generous framework conditions have been created for using the two project-based Kyoto mechanisms. Allowances totalling 90 million tonnes of emissions per year can be used from the Clean Development and the Joint Implementation mechanisms. This gives German companies a broad scope for low-cost climate protection projects abroad. At the same time this option promotes the urgently needed transfer of technologies and know-how in developing and newly industrialising countries.

Furthermore, the German Bundestag has decided that as of 2008, 40 million emissions allowances will be sold each year. This will mean that EU-wide, Germany will auction the largest share of allowances. "By selling almost 10 percent of emissions allowances, we are entering the future of emissions trading and thus taking on a leading role in Europe," stressed the environment minister. A larger share is not possible in the second trading period, as under the EU Emissions Trading Directive a maximum of 10 percent of the total allocation volume may be auctioned during the years 2008 to 2012.

In the course of the debate on how to structure the auctioning scheme, energy intensive industries and energy suppliers argued that a sale of allowances would lead to higher electricity prices. However this is not to be expected. The experience of the first trading period showed that the energy supply companies had already incorporated the free allocation of allowances into the electricity price. This yielded, and continues to yield, additional profits amounting to billions. A further price effect on the electricity market arising from auctioning is therefore not anticipated, as the market value of the allowances has already been calculated into the electricity price. There are therefore absolutely no grounds for raising the electricity price again.