A successful energy transition requires CO2-oriented energy price reform – KfW

Germany’s energy transition and integration of renewable power sources into the heating and transport sectors is held back by the current system of taxes and surcharges, Holger Höfling and Jasmin Milke write in a research paper of Germany’s development bank KfW. There are big discrepancies between household power prices (very high) and power costs for industrial users (relatively low in a European comparison) as well as between taxes on electricity (over 23 ct/kWh) and light heating oil (1.6 ct/kWh), the paper highlights. This system has a “steering function that contradicts reaching the climate targets” and prevents necessary change, for example by making customers favour cheap oil and gas heating over more efficient electrical heat pumps, the authors say. They suggest a European wide CO2 floor price in the emissions trading system (EU ETS) and measures that would make a CO2-oriented reform of energy prices bearable to consumers. There is a wide consensus among researchers that such a reform is necessary but pursuing it would require “strong political will and affirmation of climate action”, the report says.

Germany’s environment minister Svenja Schulze has repeatedly suggested a CO2 price as the KfW proposes but the rest of the government has not backed her up. A carbon price in Germany has been hailed by many research institutions as well as by the private sector as a much-needed addition to the country’s climate policy. However, opposition to the idea has been strong, not least because of fears over a public backlash if fuel and heating oil prices rise as a result. According to an expert panel advising the German government, a price on CO2 emissions would not only bring down emissions but also boost innovative technologies and business models that are key for the success of the energy transition.