Climate plan for Germany and Europe: Economists propose CO2 price reform

03.12.2018 - A few days ago the UN Environment Agency advocated an international green tax reform - now economists have presented a new concept for a CO2 price reform in Germany and Europe right before the start of the climate summit in Katowice, Poland. SPIEGEL magazine was reporting on this issue in advance this weekend. Christoph Schmidt, Chair of the German Council of Economic Experts from RWI Essen, Leibniz Institute for Economic Research, and Ottmar Edenhofer, Director of the Potsdam Institute for Climate Impact Research (PIK) and the Mercator Research Institute on Global Commons and Climate Change (MCC), have jointly drafted the cornerstones for a market-based way out of coal. Climate-damaging CO2-emissions would need to become more expensive, while at the same time the electricity tax could be lowered. A socially just and efficient transition to a sustainable economy is possible, according to the professors, who both belong to the Leibniz Association. If, on the other hand, greenhouse gas emissions were not reduced, there would be the risk of economic climate damage of unprecedented proportions.
Climate plan for Germany and Europe: Economists propose CO2 price reform

"This is not about increasing the tax burden, it is about distributing it differently," says Ottmar Edenhofer in SPIEGEL magazine. "Today, for example, we tax natural gas much higher than heating oil, even though it is comparatively less harmful to the climate. We want to put an end to such nonsense and in future levy taxes on all energy sources according to their CO2 content. And something else is part of our concept: What the state earns additionally, it gives back to the economy and consumers." The two economists believe that Germany could implement the climate plan together with a pioneer coalition of other European countries - France in particular is strongly committed to effective CO2 pricing, but the Netherlands and Scandinavian countries have also recognized the issue.

The plan comprises three core elements:

  • In European emissions trading, a minimum price of 20 EURO per tonne of CO2 is set jointly with European partners. By 2030, this minimum price will rise to 35 EURO. This means that the German climate targets in the energy industry will probably be achieved in 2030.
  • At the same time, an energy tax reform will be implemented and converted to a uniform taxation of fossil fuels according to CO2 content. This will increase the gasoline tax in Germany by 4.6 cents per litre and the diesel tax by 5.2 cents per litre. A further proposal by Edenhofer alone would abolish the diesel privilege and raise the diesel tax by 18 cents per litre to the level of the gasoline tax.
  • The electricity tax will be reduced to the European minimum rate in order to relieve the burden on households and promote sector coupling. Additional revenue will be used to compensate low-income household

"Those who contribute to CO2 emissions must be prepared to pay higher prices or taxes in the future"

Edenhofer warned that in particular an exit out of coal could only make a real contribution to stabilising our climate in combination with a CO2 price reform. If - as currently discussed - power plants are simply shut down, this could have an absurd effect, according to the economist. "Then the price of electricity would rise and it would pay off to power up coal-fired power plants that have not been running at full capacity so far." As a result, greenhouse gas emissions could even rise. If, on the other hand, we were to make the use of coal more expensive through a higher minimum CO2 price, this could be prevented.

Climate stabilisation measures must be taken to ensure that our economy continues to function properly, Edenhofer and Schmidt agree. "Those who contribute to CO2 emissions must be prepared to pay higher prices or taxes in the future," explains Schmidt, Chair of the German Council of Economic Expert. "What will be the consequences? Companies and consumers will consider what they can relinquish, or what technologies they can use to limit their costs. We are relying on the inventiveness and adaptability of the individual instead of a planned economy". And: "If we do not distinctly shift towards market-based instruments with regard to the energy transition but continue along the current small-scale and planned economic path, it will become much more expensive overall - ultimately to the expense of the citizens".

UN Environment Agency: Closing the gap between words and deeds

The United Nations Environment Programme (UNEP) had previously made it clear in its report on the development of greenhouse gas emissions that the measures taken to date were not sufficient to stabilise the climate. The report advocates a "green international tax reform". Of the report's nearly twenty authors, several work at the Potsdam Institute and the MCC, including Gunnar Luderer and Brigitte Knopf.

"There is still a tremendous gap between words and deeds, between the targets agreed by governments worldwide to stabilize our climate and the measures to achieve these goals", explains Gunnar Luderer, Senior Scientists from PIK. "Global emissions of greenhouse gases continue to rise, and so do climate risks. Only a rapid turnaround can help here: emissions must be reduced by a quarter by 2030 in order to keep the world on track for limiting warming to less than 2 degrees Celsius - for 1.5° emissions would even have to be halved. Germany and Europe could demonstrate leadership in this area by pledging complete greenhouse gas neutrality by 2050 and a clear strengthening of the emission reduction targets for 2030."

"In addition to the emissions gap we must also talk about the ‘policy gap’ in the implementation", stresses Brigitte Knopf, Secretary General of MCC. "A green fiscal reform for the low-carbon transition - including phasing out fossil fuel subsidies and putting a price on carbon - would be a cornerstone for closing this gap and fulfilling the Paris Agreement. Carbon pricing revenues could be used to lower other taxes, to invest in sustainable infrastructure or to compensate poorer households. At present, however, half of the energy emissions are unpriced, with no taxation at all. This policy gap must be closed quickly - otherwise the Paris climate targets will be out of reach.”

Weblink to the joint proposal of Ottmar Edenhofer (PIK/MCC) and Christoph Schmidt (RWI):

Weblink tot the dossier of PIK and MCC: Eckpunkte einer CO2-Preisreform für Deutschland:

Weblink to the UN Emissions Gap Report: