Costly gap: Germany to fall significantly short of EU climate targets

Germany will likely emit 150 million tonnes more of CO2-equivalent gases than EU rules created by the Effort Sharing Regulation permit, which is expected to result in a hefty penalty payment of up to EUR30 billion.

The EU’s effort sharing regulation (ESR), last revised in March, covers 60% of emissions in the bloc, and is a supplementary measure to the emissions trading scheme (ETS I) that covers industry and the energy sector.

With the ESR distributing the burden of climate protection measures based on every country’s wealth, the five richest EU countries – which include Germany – must cut their emissions by 50% by 2030. Poorer countries have a lower threshold – Bulgaria, for example, has to cut emissions by 10%.

As both the buildings and transport sectors in Germany are expected to miss their climate targets significantly, a gap of 150 million tonnes of CO2-equivalent gases relative to the ESR targets is expected. If this is the case, Germany will have to purchase allowances from other countries to make up the shortfall, at prices as yet unknown.

“We not only have national obligations, but also European commitments,” explained Brigitte Knopf, vice-chair of the German climate expert panel, on Tuesday (22 August). Those commitments were seemingly ignored by Berlin during the revision of its climate law, she added.

In the spring, Germany decided to abolish individual sector climate targets, instead opting for a whole-system approach. Despite public statements by senior government officials that overall climate targets will be reached, a significant overspill of more than 200 million tonnes by 2030 is expected, the experts of the climate panel found.

While that may spell legal trouble for Berlin, the financial implications of failing to cut back on CO2-equivalent emissions are likely to come at a price, too.

In 2022, Germany was forced to purchase 11 million carbon certificates from Bulgaria, Czechia and Hungary for the period of 2013 to 2020 – these came relatively cheaply due to their abundance at the time as most countries had a surplus.

However, for the period of 2021 to 2027, the gap between Germany’s target and real emissions is likely to be 15 times larger. Meanwhile, as the targets are becoming more ambitious for all countries as part of the EU’s ‘Fit for 55’ climate package, fewer countries are likely to have significant leftover emission allowances.

“The price for emission allowances under the EU Climate Change Regulation is basically still completely uncertain,” says Jakob Graichen, a senior expert at the German ?ko Institute.

However, it is to be expected that the price will be based on the upcoming EU emissions trading scheme for buildings and transport, which, according to the expert, would then be prices of “more than EUR50 per emission allowance, possibly even several hundred euros”.

At a gap of 150 million allowances, the penalty for missing the effort-sharing targets could be hefty: upwards of EUR7.5 billion at the very least, although EUR30 billion could easily be reached.

Ultimately, though, prices for allowances are a consequence of bilateral negotiations between EU countries – for instance, Bulgaria could offer its allowances to Germany on the cheap, once more.

What would happen should Germany be unable to procure sufficient quantities of emission allowances, as other EU countries are unlikely to significantly overachieve their targets – leaving little remaining?

“That is precisely the big question. Nobody knows for sure,” stressed Knopf. By late October, the European Environmental Agency is expected to publish more concrete analyses of EU countries’ ability to meet their effort-sharing goals.