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German refiners to get carbon price break under 'anti-leakage' proposal

20 April 2021 Cristina Brooks

Germany may give a form of relief to refiners at risk of relocating due to the January launch of a national fuel emissions carbon pricing regime.

It aims to prevent "carbon leakage," or companies trying to escape the regime's reach by moving operations abroad, inadvertently creating more emissions in the process.

Using a 31 March draft ordinance, fuel suppliers operating in Germany that meet strict criteria can receive compensation for allowances they need to comply with the national emissions trading system (nETS) under the Fuel Emissions Trading Act (BEHG).

The nETS covers suppliers of gasoline, diesel oil, heating oil, liquefied and natural gas used in transport and heating, as well as certain manufacturers already required to participate in the EU Emissions Trading Scheme (ETS).

The relief scheme should pass through parliament by the summer. It is currently under review in the lower chamber of the German parliament, the Bundestag, specifically by the Commission on Environment, Nature Conservation, and Nuclear Safety, a German government spokesperson told IHS Markit.

It will also have to be approved by the European Commission to ensure it follows state aid rules, possibly by the autumn.

Not just fuel suppliers would get relief. Other companies eligible for compensation to put towards allowances include some iron and steel manufacturers, and industrial gas and chemical producers.

The amount of compensation varies by sector. It ranges between 65% and 95%, with the higher levels of compensation reserved for companies that reach a certain emissions intensity by 2023, according to a blog by two Hogan Lovells attorneys in Dusseldorf, Associate Finn Poll-Wolbeck and Partner Stefan Schroeder.

The new rule would alleviate some of the burden placed on companies by nETS. Carbon prices have been set at €25/mt ($22/mt) of emitted carbon, and will gradually increase to €55/mt ($30/mt), according to the Hogan Lovells attorneys.

While the system is up-and-running with no problems reported, fuel companies have not yet begun to purchase allowances. "Whereas affected companies, the 'suppliers' of fuel, have already largely begun to raise prices for their customers according to the expected costs for the certificates, the actual purchase of emissions certificates will largely begin in the second half of the year," Poll-Wolbeck told IHS Markit.

So far, the carbon pricing system is not burdensome. Sina Barragan, a consultant specializing in emissions trading and energy efficiency with the German sustainability risk management firm Gallehr+Partner, predicts companies will invest accordingly as carbon prices rise. "Now, they don't do much, to be honest. It's a bit far away, so they don't have what is coming up on their minds. It is a big administrative expense, and that is how they see it," Barragan told IHS Markit.

"There might still be carbon leakage if companies get the leakage aid, because they need to produce offsets to get the aid. They need to have measures to decarbonize fuel production processes and improve energy efficiency, so it's not easy to get the carbon leakage aid," she said. "There is also an emissions intensity target."

In another recent bill, Germany's Federal Immission Control Act (FIPA) also encouraged its refiners to supply greener fuel, like hydrogen, to the aviation and industrial sectors.

Emissions goal

Germany's system is tackling emissions in heating and vehicles, which have for the large part only been mulled for inclusion in the much-larger EU ETS.

Cutting emissions for these sectors is expected to put Germany on the path to reach its 2050 goal for carbon neutrality, set in 2016. Germany is one of only eight nations worldwide that have already agreed or started to implement such a policy.

Barragan said the scheme will play a part in reducing emissions in Germany as carbon prices rise. "It's a good thing, because it's very helpful too, but it is just a part. The prices per ton of carbon go up linearly from 2021 to 2025, and then it gets even higher," she said.

But a non-profit group, The Citizens' Climate Lobby Germany, said the move undermined the purpose of emissions trading in theory. "In practice ... the federal government now wants to exempt large parts of the manufacturing industry from the CO2 price. Depending on the industry, they can continue to emit between 60% and 95% of their CO2 emissions free of charge," it said in a statement.

It said the "far too generous" compensation needlessly relieved industries with low risk of leakage because the carbon price equaled 0.025% of their gross value as well as those that had no international competition. It also argued the scheme did not assess the need for compensation on a company-by-company basis.

Germany's industry cried foul for the opposite reason. "The limited scope of economic sectors benefitting from the ordinance is one main point of criticism by the public, whereas environmental organizations criticize that the intended effect of the fuel emissions trading system, the price increase carbon dioxide emissions, and thus the incentive to reduce emissions, is offset by the payments received under the ordinance," said Poll-Wolbeck.

While the "sector list" benefitting from the ordinance could be expanded, the current list is based on EU ETS rules, he said.

If the ordinance proves successful, it could prevent the carbon leakage that might hike emissions for some of Germany's neighbors. For example, German trucking companies may choose to buy fuel in Denmark, where it would be cheaper because it does not include the German carbon price. The Danish tax ministry has already published estimates for an expected increase in Danish diesel sales.

But carbon leakage may not be a major concern for Germany, as the EU ETS has only caused minor leakage investments outside the EU, according to a 2018 study by the federal environment agency.

Cap-and-trade for refiners

The cap-and-trade system capturing fossil fuel suppliers' emissions in Germany follows a similar linked system established between California and Quebec in 2014. China in February launched a cap-and-trade system for power generators' emissions that might include petrochemicals and industrial emitters eventually.

The EU, meanwhile, may be expanding its regime alongside the potential raising of its 2050 emissions ambitions, potentially involving heating fuel for the first time. "Massive investments in energy efficiency, new production techniques, and adaptation to low-carbon fuels will be required to reduce emissions quickly," predicted IHS Markit analysts in a recent report.

Posted 20 April 2021 by Cristina Brooks, Senior Journalist, Climate & Sustainability, IHS Markit

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