New regulation aims to prevent carbon leakage due to national CO2 price

The German government has adopted a regulation to ensure the competitiveness of companies in light of the recently implemented CO2 price, the environment ministry (BMU) announced today. Companies subject to fuel emissions trading in the transport and heating sectors will in future receive financial compensation if CO2 pricing leads to an international competitive disadvantage, the BMU writes. The majority of these funds must be invested in climate action. “Migration abroad would not benefit anyone, including the climate,” environment minister Svenja Schulze said. The new regulation will help companies to “become pioneers in a climate-neutral global economy,” she added. Compensation payments are scaled between 65 and 95 percent depending on the level of emission intensity of a sector, as well as the quantities of fuel or heat eligible for subsidies and a benchmark approach that ensures the subsidy levels set by the 10 percent best plants in a sector. Companies are in turn obliged to invest at least 80 percent of the funding in climate protection measures, with a transition period in 2023 and 2024 in which climate-friendly investments need to make up 50 percent.

In a response to decision, the German Chemical Industry Association (VCI) says "the regulation comes months too late, has many pitfalls and hardly fulfils the purpose of the necessary relief." Although the chemical industry can "theoretically benefit" from the relief, they will be put at a disadvantage compared to plants that fall under EU's emissions trading, due to the additional treshold they have to meet, the associaton says. "Such regulations would have to apply at least throughout Europe, better still globally, as otherwise they would only cause competitive disadvantages in Germany without having any noticeable effect on the climate," criticised head of VCI Wolfgang Große Entrup.

Germany introduced a CO2 price in the heating and transport sector in January 2021 with a fixed price of 25 euros per tonne of CO2, which will increase to 55 euros by 2025. Electricity generation, industry and aviation are part of the EU’s carbon pricing scheme (EU ETS).