Poor States, Rich Federal Government – Winners and Losers of the Emissions Trading Scheme

By entering the third phase of the European Union Emissions Trading Scheme (2013-2020), some German federal states and some cities or councils will have to pay dearly. As of 2013 a considerable share of emission certificates will not be distributed free of charge, but will be auctioned off instead. Thus, companies that are legally bound to participate in emissions trading will have to spend considerably more money in the future for emitting carbon dioxide. It is expected that the firms’ pricing for their products will remain unaffected.

A reason for this is that emission certificates can already be sold on the market during the phase when certificates are allocated for free. Thus, they represent a value that is already priced in the goods by firms participating in emissions trading and that reflects the opportunity costs of the production decisions. At the auctioning of certificates, in particular the firms’ operating costs increase due to the pricing in. This leads to a decline in profits and a decrease in governmental fiscal revenue from commercial and corporate taxes on federal and state level. But whereas the federal government more than compensates for its income losses by its profits from selling national emissions rights (the current legal situation only grants this privilege to the federal government), the state governments and local councils are left with the deficits in fiscal revenues. These are the findings of a study conducted by the Centre for European Economic Research (ZEW) Mannheim in cooperation with LMU Munich. The study was conducted on behalf of the Hessian Ministry of Environment, Energy, Agriculture and Consumer Protection

Currently in Germany, companies in five industry branches as well as thermal power plants are bound to participate in the European Emissions Trading Scheme. Depending on the price for emissions per ton of carbon dioxide, the German federal government can expect revenues between €34.8bn and €92.9bn for a certificate price of €15 or €40 per ton of CO2, respectively. The tax losses for the federal government are expected not to exceed €2.6bn or €6.9bn for a price of €15 or €40 per ton of CO2, respectively. For prices for emissions per ton of carbon dioxide set in advance, the tax losses for the individual states and local councils amount to some €7bn or €18.6bn, respectively. This is twice as much as for the federal government, which only bears for 27 per cent of tax losses.

Since the locations of firms bound to participate in emissions trading are unequally distributed in Germany, the individual state governments are affected by the expected tax losses to different degrees. For instance, North Rhine-Westphalia has to bear some 49 per cent of tax losses in 2013, whereas Thüringen only has to bear a share of 0.5 per cent.

The current legal situation mainly sets the possible uses of revenues received from auctioning off CO2 certificates. According to legislation, in addition to the revenues for the federal government, €900mn per year goes to the special federal assets of the Energy and Climate Fund (Energie- und Klimafond EKF). This fund is primarily aimed at measures for avoiding emissions as well as increasing energy efficiency, for instance energetic building refurbishments. The local councils and state governments are not directly involved in the fund’s means. The EU sets objectives for the member states to finance adaption and climate protection measures partly by means of profits from auctions. Both federal and state tasks are affected by such an application of funds for a special purpose. Until now, however, the fund does not include fostering national adaption measures.

The federal government holds the main responsibility for climate protection measures in terms of reducing emissions, e.g. by sustainable traffic management or measures to improve the energy efficiency. Since an efficient climate policy is to be cost-efficient and since abatement costs differ from region to region, coordinating climate protection measures on federal level makes good economic sense. Due to the local impact of climate change, e.g. investments in flood protection of rivers, adaption measures are primarily the responsibility of state governments and local councils.

"With regard to the necessary adaption measures as well as tax losses, it makes sense to partially distribute profits, which were received by auctioning CO2 certificates, to the state governments," says Professor Dr. Andreas Löschel, head of ZEW research department Environmental and Resource Economics, Environmental Management. "Coming to an agreement between the federal government and the state governments will not only be difficult but lead to tensions between the individual states. Due to the uneven distribution of firms bound to participate in emissions trading, the federal states are affected differently by tax losses and climate change, and differ in their capacities to adapt."

For further information please contact

Christiane Reif, Phone +49 621/1235-209, E-mail reif@zew.de

Prof. Dr. Andreas Löschel, Phone +49 621/1235-200, E-mail loeschel@zew.de