Emissions trading or carbon pricing? An analysis

A carbon levy on the energy tax is the best option

Integrating further sectors such as transport or buildings into emissions trading is a lengthy and complex process. Realistically, any such expansion of the trade in emissions allowances is unlikely to take place before the mid-2020s at the earliest. By contrast, adding a carbon levy to the energy tax is a quicker and easier option, so the climate benefits will start sooner, according to a new study by the Oeko-Institut for Agora Energiewende.

Restructuring emissions trading will take time

Why would it take so long? There are many factors in play: firstly, appropriate legislation would have to be put in place for the introduction of emissions trading in additional sectors – from rules on reporting, verification and calculation of these emissions separately from those already covered by the EU ETS, to regulations on financial market supervision and VAT. This would involve complex law-making at the national level, as well as negotiations with the European Commission and other EU member states, possibly delaying the launch of the expanded scheme until the mid-2020s.

And a further point: gathering the required core data takes time. In contrast to the manageable number of carbon emitters covered by the EU scheme, the inclusion of additional sectors would bring a large number of new entrants into the market. More than 1,900 facilities operated by German electricity companies and industry currently participate in mandatory EU emissions trading. Extending emissions trading to the building and transport sectors would require data from many thousands of companies to be gathered, verified and processed – and this applies even if their emissions were regulated via the energy vendors.

A more workable option: a carbon levy on the energy tax

“We ran practical simulations of a very large number of options for the expansion of EU emissions trading,” says Dr Felix Christian Matthes, Research Coordinator for Energy and Climate Policy at the Oeko-Institut. “We recognise that an emissions trading scheme is a very complex mechanism, so reforming the energy tax by imposing a carbon levy would be the quicker and easier alternative, at least in the short term.”

Introducing emissions trading for other sectors is feasible in principle, he says, but is more likely to be a medium-term option. “If emissions trading is the way forward, it needs to be a very high-quality scheme,” Dr Matthes emphasises. “We experienced numerous challenges when introducing the EU emissions trading system, ranging from all kinds of data-related problems to VAT fraud. We must not let that happen again.”

Die praktische Umsetzung von Emissionshandelssystemen für die vom EU ETS nicht erfassten Bereiche: study by the Oeko-Institut (= Introducing emissions trading systems for non-ETS sectors – practical aspects)

Further information on carbon pricing

<link presse archiv-pressemeldungen co2-zuschlag-zur-energiesteuer-rechtlich-unbedenklich>Press release: CO2-Zuschlag zur Energiesteuer rechtlich unbedenklich (= No legal obstacles to a carbon levy on the energy tax)