Carbon Pricing in Germany, with Christian Flachsland

Notable Quotes

• “For the EU ETS sectors, we suggest to introduce a price floor to insure against downward price risk of 20 euro in the year 2020, and then rising to 35 euro in the year 2030. That would be sufficient to achieve the emission targets in the German electricity sector that Germany has set for itself and that it also has in the EU climate legislation.” (7:54)
• “My own take on this is it would be absolutely fantastic to get an EU-wide minimum price in the ETS, and coordinate carbon pricing in the other sectors across the European Union.” (11:44)
• “The renewable constituency has begun endorsing a carbon price. . . it used to be a very divisive discussion between proponents of carbon pricing and of renewables. This is very new that we have a coalition emerging here, which is one of my favorite German policy developments.” (16:19)

Top of the Stack

References and recommendations made by Christian Flachsland:

• "Carbon Budget 2018" by Global Carbon Project

The Full Transcript

Kristin Hayes: Hello and welcome to Resources Radio, a weekly podcast from Resources for the Future (RFF). I'm your host, Kristin Hayes.

Our guest today is Dr. Christian Flachsland, who is the head of the Governance Working Group at Germany's Mercator Research Institute on Global Commons and Climate Change. He is also an assistant professor for climate and energy governance at the Hertie School of Governance. His research interests include climate and energy policy assessment, international collaboration, and the science-policy interface. Today, our conversation will focus on the ongoing carbon pricing debate in Germany. Stay with us.

Christian, thanks so much for joining us. You're based in Berlin, but I'm very pleased to be recording this podcast with you in person, during one of your visits to RFF—so glad you could make it.

Christian Flachsland: Thanks for having me.

Kristin Hayes: You've been working on climate policy and governance issues for a number of years now, including through international processes such as the Intergovernmental Panel on Climate Change. How did your interest in these topics start?

Christian Flachsland: When I came of high school and started studying social sciences and economics, I did that with the intention to use rigor and develop rigorous knowledge to improve the world, actually. That was my intention at the time. I was studying in Potsdam, and I attended a class by an economist from PIK, the Potsdam Institute for Climate Impact Research, which is one of the major climate research institutes in Germany. I was quite fascinated by the vastness and intellectual complexity of the climate problem at the time and how it required truly interdisciplinary thinking in the social sciences, but also working with natural sciences—and that still attracts me until today, basically. So, to cut a long story very short, I started PIK as a student assistant (as it often goes) with Ottmar Edenhofer, who is by now a famous climate economist. And, with some interruptions, I've been working with him for the past 18 years, actually doing my PhD at PIK and then helping establishing the MCC, the Mercator Institute on Global Commons and Climate Change in Berlin and then becoming an assistant professor—along the way also working on the IPCC where Ottmar was a co-chair on mitigation in the last report cycle.

Kristin Hayes: That's great. So, let's turn to the focus of today's podcast in particular. I've heard that there's increasing interest in expanding carbon pricing in Germany. As Germany is already part of the European Emissions Trading System, why is that the case? Why are they looking to expand?

Christian Flachsland: Indeed, we have an increasing debate on this. So, for example, the major German weekly, Der Spiegel (which is sort of comparable to Time magazine, in the past I learned here in the United States), had its title story on climate change and on carbon pricing in particular. And colleagues of mine and I (in particular Ottmar Edenhofer) worked on background pieces to inform that title story in full. It's been an important push in the German debate about carbon pricing. But before going specifically into that, I think it’s useful to give some more general background on German climate and energy policy these days.

As many people in the audience will know, subsidies in the electricity sector have been very important for German energy and climate policy. So we have just the numbers out for 2018—we now have close to 40 percent of electricity demand in Germany being met by renewables. This has been a very high increase over the past 10 years. But this has also come at a very high cost. The annual subsidies are 30 billion euros per year, and the dollar number does not differ that much from that. But then coal emissions in the German electricity sector haven't actually declined that much. What happened is we have started to phase out nuclear, so renewable [energy] is substituted for nuclear—but we also started exporting electricity to our neighboring countries. So you can have an increasing share of renewables but don't reduce emissions, and this is what's happening in Germany, which is not so nice from a climate perspective, of course.

Having recognized that, the current government coalition has set up a so-called "coal commission," and the aim of that commission is to come up with a schedule for phasing out lignite power plants in Germany over the next 20 to 30 years. The commission will come forward with their proposal next month (it has planned to do that—let's see what actually happens). And then we would have a plant-by-plant schedule for how long the plants run and how much generation they are allowed, which is modeled after the German nuclear exit, actually. That's sort of the blueprint. That's what people know in Germany and this has been pushed, pretty much, by the environmental movement.

We also have the European Emissions Trading System [EU ETS], as we mentioned, covering the electricity sector—you might ask why we have an additional instrument. It's true that the price has been very low in recent years, hovering around five euros. And many have doubted that this is in line with what you need in the long term, and I am one of these people. The price has increased in the past year but there is a significant downside risk of this price collapsing again. Most best to go into detail here—there’s some of the work we do with Dallas Burtraw from Resources for the Future, having a minimum price in the EU ETS (I'll come back to that later) would be quite useful but it still leaves us with transport, buildings, and non-covered industry.

And just very quickly—transport emissions have been rising in Germany. The CO2 [carbon dioxide] intensity standards have not been effective in reducing those. Buildings is constant; we don't have effective policies there. And as a result of all that (low ETS prices, ineffective policies in the other sectors), Germany will miss its 2020 emissions target and also likely its 2030 emissions target, which it has adopted under formal EU climate policy. So Germany actually has a requirement to reduce its emissions under EU law. And the interesting thing, and few people have been aware of this, is that if Germany has any shortfall in emissions in the non-ETS sectors, it actually needs to buy allowances for these uncovered emissions from other countries within the European Union.

So we have an Emissions Trading System among governments for non-ETS sectors, which is very much modeled after the Kyoto Protocol trading. Some people have done the numbers on what might be the shortfall in German emissions until 2030 and what might be the price of allowances, and the higher end of the estimate of the cost of purchasing allowances is 60 billion euros for these 10 years. And that of course gets people going "So why should we pay other governments in Europe for buying these allowances? Emissions trading is great, yes, but why not have more effective policies in Germany in the first place? Also, why not harmonize more the [inaudible 00:06:51] price of emissions reductions outside the ETS because this would be a higher price than inside the EU ETS?"

So there will be pressure to connect these different sectors. Even though we don't have price-based policies outside the ETS, we're going to have a price signal eventually showing up in the balance sheet of governments. And then you sort of naturally arrive at the discussion about carbon pricing, because why not have carbon pricing in the first place that would push down allowance. That was sort of the starting point of this more recent discussion about carbon pricing.

Kristin Hayes: Lots of reasons, it sounds like, to consider additional carbon pricing policies, including ratcheting up ambition and harmonizing instruments and addressing other sectors—a lot of the same issues that I think jurisdictions all over the world are looking at,so that's very interesting.

You and your colleagues have been thinking about the shape that a German carbon pricing reform, or addition, could take. Can you say a little bit more about your particular proposal?

Christian Flachsland: Sure. At its core, the proposal is quite simple. For the EU ETS sectors, we suggest to introduce a price floor to insure against downward price risk—of 20 euro in the year 2020 and then rising to 35 euro in the year 2030. That would be sufficient to achieve the emissions targets in the German electricity sector that Germany has set for itself and that it also has in the EU climate legislation.

The second part of the proposal concerns the non-ETS sectors (transport, non-covered industry, buildings). We have implicit carbon prices in place here, which is energy taxes—we just tax energy. We propose to re-base that energy taxation to the CO2 content of the covered fossil fuels and then take the same carbon price rates as we suggest for the EU ETS sectors so that we would have a harmonized pricing across the economy.

Now, that would not be enough to achieve the emissions targets in those other sectors. We would need additional policy for that. Or we can start a discussion about whether we should have a higher carbon price to achieve those. One or the other. But we chose to start modestly because I think there is a high value in having a modest carbon price to start with (that is rising modestly), to get the infrastructure in place, get people used to it, stabilize the instrument, and avoid any backlash (as we have witnessed in France recently)2.

Kristin Hayes: So, part of policy design is in fact figuring out what is politically palatable. I want to ask you a couple of questions about that. The use of revenue is always a thorny issue in carbon pricing design. What are your thoughts about the best uses of revenue from any expansion of carbon pricing in Germany?

Christian Flachsland: One very big concern is about the impact of carbon pricing on low-income households in Germany. Actually our [inaudible 00:09:41] is quite regressive (the subsidies are quite regressive), because its a flat fee on electricity consumption which is equal to all households. So it’s very regressive. Our proposal is to eliminate the electricity tax that we have in place. We have a tax on electricity, actually, no matter where it comes from. We also tax renewable electricity, even though we also subsidize it. And we want to electrify the economy and have a sector coupling as a major way of decarbonizing the economy—but we have tax on electricity, which is inhibiting this. So it doesn't make sense, from an allocative perspective. But also, this electricity tax is highly regressive and getting rid of it would offset some of the regressive effects.

It just so happens that the additional revenues we would raise with the reform that we suggest (which is roughly around seven billion euros) are almost equivalent to the current power tax revenue—so we could eliminate the one and raise the carbon price on the other hand. Going forward, and if we would have a higher price or more revenues, you will need additional policies I think to offset regressiveness. This is really on people's minds, also in conservative parties. This is a widely held concern that needs to be addressed and it hasn't been addressed so far, at all. So of course in the EU ETS we also have revenues and we spend those—but this is all on green spending, climate measures, international climate finance. I think we have to change strategy a bit here for visibility.

Kristin Hayes: Yeah. Very interesting. Definitely issues that will be familiar to our US-based audience as well, as these policies are debated in this country. Can you say a little bit more about the political prospects for such a reform? Aside from the revenue-raising, I'm sure there are many other considerations that policymakers have. Any reflections on some of those?

Christian Flachsland: Actually, one of the first questions is: Is this feasible and desirable to do it on a German level, or even a small coalition of countries as I mentioned earlier? Or should it be done at the EU-wide level? There is a lot of disagreement.

My own take on this is it would be absolutely fantastic to get an EU-wide minimum price in the ETS, and coordinate carbon pricing in the other sectors across the European Union. We actually tried this in the late 2000s, to harmonize road transport taxation. Completely failed. But I still think it would be worthwhile for policymakers to invest significant resources into achieving this, and use our well-established tools of compensating eastern European and southern European countries to move along. This is something we do all the time in climate and energy policy and other fields. This would be very important to set a precedent for international climate policy negotiations. For me, the EU was always the laboratory to test multilateral climate policy. If we fail on this, how can we ever get anywhere globally? But it’s still difficult enough, even with neighboring countries, such as Germany and Poland. It's quite frustrating, actually. I keep telling my German colleagues we have to try—there is a high value in developing models for tackling these issues.

All of that said, policymakers keep telling me it’s very difficult, hard to achieve. I have to believe them at some point, so the alternative plan if the EU option fails would be to form a coalition of countries. France, the Netherlands, Sweden—they have all announced they would be willing to do this. They are basically waiting for Germany to make up its mind. At least for the EU ETS minimum price option. We could also consider a non-ETS pricing option. And then this approach would, of course, be open to others over time, and they should join the coalition. Of course, the dream would be that you (in the end) get the EU-wide approach. But you would need to take care to enable this.

This is an example of what is now being discussed as a “multi-speed” Europe, because in all policy areas we have some disagreement across member states. Then, of course, you always have those who want to do more, those who do less. And then do you water down to the least common denominator, or do you have a multi-speed approach? The euro currency is an example of the multi-speed Europe—only some countries have it.

Kristin Hayes: So it does seem like the international context is particularly important when it comes to thinking about this. Are there domestic concerns as well, just within the country borders? If, for example, Germany did have to implement sole-country additional carbon pricing?

Christian Flachsland: Yeah, so the first concern in Germany is always about the industry sector, because we are a strongly export-oriented industry. We have a lot of energy-intensive industries and they have always been very concerned about unilateral climate policy. This is also why we have a lot of compensatory policies in place (such as electricity price increase exemptions for energy-intensive industries, free allocation of allowances) so they are pretty well-shielded from these competitiveness issues.

In fact, the German industry association came out with a quite impressive study last year that argued that Germany can reduce its emissions by 85 percent until 2050, relative to 1990 levels, which is the German long-term emissions goal. In a way, that would be beneficial even to German industry because it has this competitive advantage of producing very energy- and emissions-efficient products.

So even if the rest of the world does not adopt policy as stringent as the German policy (but at least some climate policy), they find Germany can actually do it. So that's quite impressive, actually. Industry has actually started to support carbon pricing as an approach in Germany, but this has been an important development. Then we have this coal commission I mentioned earlier in the power sector, there are a lot of people in there who are in favor of carbon pricing. I hope they will set this on the agenda: a carbon price complementing this coal phase-out schedule so as to avoid rebound effects—where you take out lignite plants but then electricity becomes more expensive, and that then leads to increased hard coal power production. That would be sort of a rebound effect. If you have a minimum price in place that can push back on that, that would be one rationale.

Then in the electricity sector, actually, you have two important constituencies. One is the gas operator. We have a lot of gas plants that are not running because they were built when people were expecting higher carbon prices, actually. They are not running because coal is more competitive now. Higher carbon prices or rising carbon prices would put these into the money. And then, of course, renewable energy operators. As I said, we have 40 percent of consumption being covered by renewables, which are highly subsidized, which is (of course) not very well-liked, even in Germany. Getting a carbon price would make these more competitive, even without the subsidies. The renewable constituency has begun endorsing a carbon price—which is very new by the way. It used to be a very divisive discussion between proponents of carbon pricing and of renewables. This is very new that we have a coalition emerging here, which is one of my favorite German policy developments, actually.

Kristin Hayes: That's really interesting. Well, Christian, I want to thank you very much, again, for joining us and talking to us a little bit about where Germany is headed in terms of policy development around carbon pricing. It sounds like Germany has a very strong leadership role to play here, so whatever decisions happen in your country will be important for the rest of the continent, too. It’s very interesting to hear. I wanted to close the podcast with our "Top of the Stack" feature. What have you read or watched or heard recently related to these issues around climate governance and climate policy that you think is particularly interesting and that you might recommend to our listeners?

Christian Flachsland: Each year, during the UNFCCC [United Nations Framework Convention on Climate Change] Conference of the Parties in November–December, the Global Carbon Budget Project releases its new presentation of data on global CO2 emissions and the development of the global energy system. I always check these immediately when they arrive, the latest numbers. It's usually quite depressing, because every year CO2 emissions keep rising. Also, if you look at the energy system development, the use of fossil energies is actually increasing—it's not stabilizing, it's not decreasing. We had a bump in coal. It's extremely sobering. And while many people find it depressing, I also find it very motivating in the sense there is so much to be done in developing effective climate policy. We actually have quite a long way to go and there is a lot of work to be done.

Kristin Hayes: Yeah, certainly information like that can be quite sobering but, as you noted, it can also be a good motivator for doing the kind of work that you do and Resources for the Future does. Thank you again. I really appreciate your time, and we look forward to seeing you back in DC on your next visit.

Christian Flachsland: Thank you very much for having me.

Kristin Hayes: Thank you so much for joining us on Resources Radio. We'd love to hear what you think, so please rate us on iTunes, or leave us a review—it helps us spread the word. Also, feel free to send us your suggestions for future episodes. Resources Radio is a podcast from Resources for the Future. RFF is an independent, nonprofit research institution in Washington, DC. Our mission is to improve environmental, energy, and natural resource decisions through impartial economic research and policy engagement. Learn more about us at rff.org. The views expressed on this podcast are solely those of the participants. They do not necessarily represent the views of Resources for the Future, which does not take institutional positions on public policies. Resources Radio is produced by Kate Petersen, with music by Daniel Raimi. Join us next week for another episode.