Germany tightens up its national climate protection programme

Federal Environment Minister Sigmar Gabriel has announced plans to tighten up Germany's National Allocation Plan substantially for the second phase of European emissions trading from 2008. The cap for permitted carbon dioxide (CO2) emissions will now be cut to 465 million tonnes per year from the 482 million tonnes originally proposed. This means that between 2008 and 2012, far fewer emission rights will be allocated to participants in the scheme than was envisaged in the first draft submitted in June this year.

On 30 June 2006, Germany was one of the very few European countries to submit the draft of its second National Allocation Plan (NAP II) to the European Commission on time. When doing so, Germany explicitly drew attention to the provisional nature of its NAP II, as it still had to complete its data collection for the period 2003-2004.

Gabriel said that after completing the data collection and following initial discussions with the European Commission on the notification procedure, Germany needed to tighten up its draft NAP II substantially. He pointed out that the targets set for NAP I, i.e. 2005-2007, had been far too low:

• NAP I (2005-2007) only prescribed a reduction of two million tonnes CO2 per year.
• The previous Government had planned a reduction of just 10 million tonnes CO2 per year for the period covered by NAP II (2008-2012).
• In its original draft of NAP II, the new German Government - a coalition of the CDU/CSU und SPD - had already increased this CO2 reduction to 15 million tonnes per year for the period 2008-2012.

But according to the Federal Environment Minister, even this target is no longer enough: "In light of actual emissions trends, both the targets set by the previous Government and our own assumptions in the first draft of NAP II are proving to be much too low for us to fulfil our commitment under the Kyoto Protocol. That is why we now need to beef up NAP II. We are determined not to jeopardise Germany's target of a 21 percent reduction in greenhouse gases." Under the revised NAP, the CO2 reduction for the entire energy and industry sectors will increase from the previous figure of 15 million tonnes to 26.5 million tonnes per year.

If the emissions trading targets in Phase 1 (NAP I, 2005-2007) for existing installations covered by the scheme are compared with the targets for these installations under NAP II, it is clear that required emission reductions have been tightened up substantially. The cap for these installations has now been cut by 61 million tonnes per year as against NAP I. As a comparison, NAP I (2005-2007) prescribed an emissions reduction of just two million tonnes CO2 per year for the entire energy and industry sectors.

Federal Environment Minister Sigmar Gabriel gave the following reasons for the revision of the NAP II notified on 30.06.2006:

1. The part of the energy and industrial sectors that is covered by emissions trading has to be corrected on the basis of the data now available for 2000-2005, with the result that fewer CO2 allowances can now be made available under the scheme. Although the draft NAP II submitted on 30.06.06 assumed that emissions trading would cover as much as 92 percent of all emissions from this sector, this figure has now fallen to around 91 percent.
2. The emissions targets for all sectors (energy, industry, private households, transport and the trade/business/service sector) were reviewed once again. This revealed that both NAP I and (to a lesser extent) the first draft of NAP II had overestimated the reduction potential for non-CO2 emissions. The sector targets have therefore been corrected: all sectors will make an equal and proportionate contribution to fulfilling Germany's climate protection target up to the 2008-2012 commitment period.
3. As regards non-CO2 emissions, there are considerable risks attached to the reductions predicted to date. There are various reasons for this: the development of organic farming is progressing more slowly than previously anticipated, due to cuts in the funding available under the second pillar of the common agricultural policy (CAP). Furthermore, the implementation of the Technical Instruction on Waste from Human Settlements (TASi), with its ban on landfill of certain types of waste, is unlikely to be able to contribute to the full extent, or at least within the envisaged timeframe, to the predicted emissions reductions. For that reason, the reduction target for 2008-2012 for non-CO2 emissions will not be achieved in this area.

In light of the above-mentioned factors, the cap for 2008-2012 will be reduced. However, the compliance factor for energy installations will be tightened up substantially for various other reasons as well:

1. Despite its pledges arising from the voluntary commitment on climate protection, German industry did not reduce its CO2 emissions in 2003 and 2004; on the contrary, emissions increased by 13.5 million tonnes per year compared with average emissions in the other years in the baseline period (2000-2005).
2. Furthermore, based on the data now available from the data collection, a number of assumptions made in the draft NAP II of 30.06.06 have to be corrected. For example, in the current period 2005-2007, fewer closures are expected than was assumed in NAP II. Furthermore, the emissions volume for new installations needs to be set at a higher level.

As a result of all these various factors, the cap will be reduced to 465 million tonnes CO2 per year and a far more stringent compliance factor will be introduced for energy installations. The outcome is a reduction commitment (compliance factor) of 29 percent in total for energy installations (NAP II of 30.06.06: 15 percent; by comparison, NAP I: up to 7.4 percent). The compliance factor will remain divided between energy and industry, with the compliance factor for industrial installations remaining unchanged at 1.25 percent.

Allocation rules: Investment security ensured by the "10 + 4" rule

In the discussions with the European Commission, it also became apparent that the Commission may be unable to accept the long-term guarantees contained in Germany's National Allocation Plans for more efficient new power stations that are to replace old plants.

However, the Commission's arguments here are not based on environmental considerations. Rather, the Commission is concerned about the possible adverse effect on competition within Europe if these guarantees only apply in Germany, even though the new German Government had already reduced the timeframe for some of these measures (10 + 4 years for replacement installations compared with 14 + 4 in NAP I).

The Commission's negative stance would mean that neither power stations built in 2005 and 2006, nor new power stations due to be built before 2012, would be able to rely on long-term investment security. In an extreme case, all the new installations built before 2007 would, from 2008, be treated as existing installations and thus be granted fewer emissions rights. New plants built between 2008 and 2012 would be treated as existing installations from as early as 2013 onwards.

From the German Government's perspective, this would crucially undermine confidence and investment security for the construction of new power stations. At the same time, the replacement of old, high-emission power stations with modern, much more efficient facilities would be put at risk. Against this background, the German Government has not taken up the European Commission's criticism of the rules contained in Germany's National Allocation Plans. We take the view that under the Emissions Trading Directive, it is a matter for Member States to offer innovation incentives. The German Government will clarify this unresolved issue in the further procedure with the Commission.