National Emissions Trading System Background Paper Editorial information Publisher German Emissions Trading Authority (DEHSt) at the German Environment Agency City Campus Building 3, Entrance 3A Buchholzweg 8 D-13627 Berlin Phone: +49 (0) 30 89 03-50 50 Fax: +49 (0) 30 89 03-50 10 [email protected] Internet: www.dehst.de/English As of November 2020 English by Nigel Pye, [email protected] Cover image: © tomas – stock.adobe.com Content 1 Introduction: Why do we need national emissions trading? ������������������������������������������������������������������������ 4 2 Fundamentals of the national emissions trading scheme ���������������������������������������������������������������������������� 5 2.1 How does emissions trading as such work? ...................................................................................5 2.2 How do national and european emissions trading differ? ����������������������������������������������������������������5 3 Scope and responsible Parties ������������������������������������������������������������������������������������������������������������������� 7 3.1 Which fuels are covered by BEHG? ................................................................................................7 3.2 Which companies are covered by nEHS? ........................................................................................7 3.3 What impact on fuel prices can be expected? .................................................................................8 3.4 Are there overlaps between national and European emissions trading? ...........................................8 4 nEHS Processes and Mode of Operation ����������������������������������������������������������������������������������������������������� 9 4.1 How is the volume target determined for greenhouse gas emissions?..............................................9 4.2 What price are certificates purchased and sold at? �����������������������������������������������������������������������10 4.3 What are the obligations of the participating companies? ������������������������������������������������������������11 4.4 Where can allowances be stored, transferred and surrendered? ....................................................11 4.5 How are infringements handled? ................................................................................................12 4.6 How will the competitiveness of companies be ensured? ��������������������������������������������������������������12 5 Conclusion & Outlook ������������������������������������������������������������������������������������������������������������������������������ 13 6 Glossar ��������������������������������������������������������������������������������������������������������������������������������������������������� 14 Annex 1 Fuels ����������������������������������������������������������������������������������������������������������������������������������������������� 15 Fuels as defined by BEHG ..................................................................................................................15 Annex 2 Fuels for emission reporting in 2021 and 2022 �������������������������������������������������������������������������������� 18 1 Introduction: Why do we need national emissions trading? In view of the major challenge that climate change poses to present and future generations due to greenhouse gas emissions, Germany has committed itself to ambitious climate protection targets at the European level under the Paris Convention. These climate protection goals were legally anchored in Germany for the first time with the Federal Climate Change Act, which came into force on 18/12/2019, in order to limit the rise in the global average temperature to well below 2 degrees Celsius and, if possible, to 1.5 degrees Celsius compared to pre-industrial levels. The Federal Republic of Germany also aims to be greenhouse gas neutral by 2050. To actually achieve this climate protection goal, climate protection measures must be taken. The Federal Government has done this with the Climate Protection Programme 2030. The CO2 pricing of emissions is a key climate protection instrument, particularly in the fields of heating and transport, which came into force with the national emissions trading scheme and the Fuel Emissions Trading Act (BEHG) on 20/12/2019. Based on the BEHG, a national emissions trading scheme (in German “nationales Emissionshandelssystem” –hereinafter referred to by the abbreviation nEHS will be introduced in Germany from 2021. The EU emissions trading scheme (EU ETS) already largely covers emissions from industry and power genera- tion in Germany: operators have had to surrender an emission allowance for every tonne of CO2 emitted since 2005. This scheme includes emission-intensive installations of both the energy sector and industry. However, Germany has so far lacked a financial incentive to reduce emissions outside the field covered by the EU ETS. The nEHS now basically includes all CO2-causing fuels put on the market, especially petrol, diesel, heating oil, liquified gas, natural gas and coal. However, companies or citizens who use these fuels for heating or driving, for example, do not have to participate in the nEHS themselves. Only the ‘distributors’ of fuels1 such as gas suppliers or companies in the mineral oil industry who are obliged to pay energy tax under the Energy Tax Act, have to do so. If the fuel distributors pass on the costs from the nEHS to their customers, they provide the desired financial incentive to reduce emissions. It is BEHG’s intention that the pricing of fuel emissions should result in a cost and make customers change their behaviour and reduce emissions. The German Emissions Trading Authority (DEHSt) at the German Environment Agency is responsible for the implementation of the nEHS. DEHSt has been implementing the EU ETS in Germany since 2005. Together with the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU) DEHSt is currently preparing the implementation of the BEHG in terms of organisation and expertise. 1 Within the scope of BEHG Section 2 (2). 4 National Emissions Trading System – Background Paper 2 Fundamentals of the national emissions trading scheme 2�1 How does emissions trading as such work? All emissions trading systems have one thing in common: emissions trading is a market-based instrument designed to protect the climate. The principle is very simple: anyone who wants to pollute the air with green- house gases needs relevant rights (‘certificates’). Emissions trading works according to the ‘Cap and Trade’ principle. This means that the greenhouse gas emissions of all participants are limited to a total volume – the ‘cap’. The cap is a political decision on the maximum amount of greenhouse gases that all participants are permitted to emit in total. However, there are no fixed emission targets for the individual participants. A cap that is ambitious in terms of climate policy ensures that the right to emit greenhouse gases becomes a scarce commodity and that trade on the market creates a price for the ‘certificates’. This market price results from auctions and trade between the participants. The price rises if the certificates become scarce because fewer certificates are available overall (because this is the only way to achieve the climate protection goals). The emissions trading system thus provides a financial incentive for participants to invest in climate protection measures. If it is cheaper to avoid one tonne of CO2 than to buy a certificate, it is worthwhile reducing the use of fossil fuels and implementing technical or organisational measures to save emissions. Market-based emissions trading means that emissions are reduced where it is economically most advantageous. 2�2 How do national and european emissions trading differ? National (nEHS) and European Emissions Trading Scheme (EU ETS) have different starting points as to how greenhouse gas emissions should be reduced. The EU ETS requires reporting and the surrender of emission allowances where emissions are generated in an installation such as in a power plant or steelworks (called ‘downstream’ emissions trading). The nEHS, however, is not based on the actual emissions at the installation, but on a much earlier point, where the fuels are placed on the market and before they reach the installation (‘upstream’ emissions trading). These emissions, which result from the subsequent burning of the fuels, are attributed to a distrib- utor. The two fundamentally different systems can be explained above all against the background of the respective sectors involved. Industrial and energy installations covered by the EU ETS are a small number of players with very high direct emissions from installations. However, in the sectors covered by the nEHS such as transport and heating, it would not be practical to include direct emissions. Including the large number of all car drivers or all heating system owners would be entirely disproportionate. i Regulatory concepts of emissions trading Upstream national Emissions Trading Obligated parties: Fuel distributors Downstream European Emissions Trading Obligated parties: Operators with direct emissions National Emissions Trading System – Background Paper 5 Emissions are limited in both systems to a certain budget or cap. nEHS does this by taking into account the EU targets for those sectors not covered by the EU ETS (see Chapter 4.1). As in the EU ETS,
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