CO2 pricing: a measure to reduce emissions

What makes the carbon price relevant for companies and why should they consider it?

Dec 7, 2023

CO2 pricing means that the damage costs caused by climate change are no longer borne by the people and communities, but by the polluters. In the process, CO2 pricing makes climate-damaging products and components more expensive, while climate-friendly products and elements become cheaper. A short 3-minute explanation can be seen in the video by"Mehr Demokratie".

As recently as mid-June 2021, experts were speculating that the CO2 price would probably not rise to €90 per tonne of CO2 until 2030. However, this value has since been exceeded and is now 96 €/t CO2 according to EMBER Climate. The CO2 price has thus risen by 81% since June 2021.

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What is the EU ETS scheme?

The EU Emission Trading System (EU-ETS) or European Emissions Trading Scheme has been in place since 2005 and was introduced to meet the climate targets set out in the Kyoto Protocol. This system has set a cap on greenhouse gas emissions that can be produced across Europe. Companies from the energy sector, energy-intensive industry and aviation from the 28 EU Member States as well as Norway, Iceland and Liechtenstein can buy "emission allowances", which have become a kind of currency under this system. These allowances give them the right to emit a certain amount of CO2 and other climate-damaging gases and can be traded between emitters. Over time, the emissions cap, the supply of certificates, is reduced and fewer certificates are issued. This is intended to put pressure on companies to move more quickly to reduce their emissions.

Details on the addition of the buildings and transport sectors have been known since mid-2021. According to this, CO2 emissions from these sectors are to be traded in a new, additional EU ETS from 2026. As a result, these sectors already have to make greater efforts to limit their CO2 emissions for reasons of profitability. On the one hand, because the price of CO2 is rising visibly, and on the other hand, because the number of emission certificates is decreasing.

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What is the difference between CO2 price and CO2 tax?

In Germany, the introduction of the CO2 tax in the heat and transport sectors has led to further direct costs. So what is the difference between the CO2 price and the CO2 tax? Compared to the EU ETS, a CO2 tax sets the price per tonne of greenhouse gas emitted, so the amount of emissions can only be influenced indirectly. The CO2 tax therefore applies, for example, to the purchase of fuel or other CO2-intensive materials. In order to achieve the set CO2 emission targets, Germany wants to accelerate the switch to alternative energy sources as well as the transport turnaround through electromobility. The German government has set itself the goal of registering seven to ten million electric vehicles in Germany by the end of 2030. This will drastically reduce the emissions generated by the use of electric cars within the country. However, the emissions associated with the production of such vehicles will increase CO2 emissions globally. In fact, the extraction of the materials needed to produce these vehicles causes huge greenhouse gas emissions, which would likely negate the CO2 savings from the use of the vehicles. Although electric vehicles are produced for the European market, these materials are mainly sourced abroad, which would shift the responsibility for CO2 emissions to these countries.

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The risk of carbon leakage

The problem explained above is closely related to so-called "carbon leakage". Carbon leakage is when companies relocate their production to other countries with less stringent emissions regulations for cost reasons related to climate policy. This could lead to an increase in their overall emissions. The risk of carbon leakage can be higher in certain energy-intensive industries. To avoid carbon leakage, the EU regularly updates its climate legislation.

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The EU and the German government have set ambitious climate targets and active climate measures such as CO2 pricing, CO2 tax and combating carbon leakage. These measures set the pace for companies to act quickly to reduce their CO2 emissions. For this reason, these measures are relevant for every company.

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