Objectives

The Federal Republic of Germany, the European Union and the Member States of the UN Climate Change Conference are jointly trying to limit climate change to a minimum. To this end, various political instruments have been established at all levels. Emissions trading is an important element in this and it should contribute to reducing emissions in Germany to the level before industrialisation in the 19th century by 2045. Its goal is to achieve climate neutrality at the lowest economical cost and as quickly as possible. We, the German Emissions Trading Authority (DEHSt) at the German Environment Agency, are responsible for implementing emissions trading.

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What is an emissions trading system?

Greenhouse gas emissions contribute significantly to global warming and climate change. There are two different emissions trading systems in Germany and their aim is to give the polluters of such emissions an economic incentive to reduce emissions. Both have the following principle in common: anyone who pollutes the air with greenhouse gases pays a price, directly or indirectly, for each tonne of CO2 equivalent by purchasing pollution rights. CO2 is the chemical formula of carbon dioxide. All gases that trigger a greenhouse effect are referred to as CO2 equivalents (CO2eq). For this purpose, the harmfulness of methane, for example, is compared with that of carbon dioxide and specified as CO2 equivalent.

Emissions trading implements the ‘cap and trade’ principle. The cap set by the state is a political decision about the maximum total amount of CO2 equivalents (CO2eq) that can be emitted. A cap that is demanding in terms of climate policy ensures that CO2 becomes a scarce commodity and that a price for CO2 is formed on the market through trade, which creates an incentive to invest in more climate protection.

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All companies that participate in emissions trading, being either installations or aircraft based, according to legal provisions must surrender one emission allowance for each tonne of CO2eq emitted. A limited number of emission allowances are made available free of charge to some of the companies from the cap in accordance with allocation rules specified throughout Europe. Companies that do not receive free emission allowances or for which the allocation is insufficient must buy emission allowances at regular auctions or from other companies. If they have too many emission allowances, they can sell them. This is where the term emissions trading comes from. Strictly speaking, it is not emissions but allowances that are traded to be allowed to emit the corresponding amount of greenhouse gases.

The auctions and trading between the companies result in a market price for the emission allowances. If there are a lot of emission allowances available (supply) in relation to the companies' emissions (demand), the market price is low. If, on the other hand, emission allowances become scarce, for example because fewer allowances are available to meet climate protection targets, the price rises.

Higher prices create incentives for more and more companies to introduce climate protection initiatives to reduce their greenhouse gas emissions. After all, if it is cheaper to prevent a tonne of CO2eq than to buy an emissions allowance, it is worth taking technical initiatives. The term CO2 tax is still often erroneously bandied about amongst the general public. As a result, we frequently receive enquiries asking for information about possible tax relief. However, since the revenues are designated for a specific group of people, this is not a tax.

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What emissions trading systems are there?

In Germany, there is a European and a national emissions trading. Together, they cover the transport, heating, energy, industry and aviation sectors, which accounted for around 85 percent of total 2021 greenhouse gas emissions in Germany.

European emissions trading

The European Emissions Trading System (EU ETS) starts where emissions are generated in large industrial installations, in power plants and in intra-European air traffic. Operators or airlines must purchase emission allowances (that is the previously mentioned pollution rights) for the emissions they cause (this is called downstream emissions trading). The European Commission has set a binding cap on the total Europe-wide CO2 emissions for each year. These pollution rights are allocated proportionally to all Member States. The competent authorities allocate a portion of these allowances to operators and airlines free of charge. If a company emits fewer CO2 equivalents than it was allocated free of charge, it can sell the surplus emission allowances to other participants. If the free allocations are not sufficient, further emission allowances must be purchased from other participants or from the relevant auction platform. In Germany, we, the German Emissions Trading Authority, are responsible for allocating pollution rights. Auctioning takes place on our behalf at the European Energy Exchange (EEX) in Leipzig. The limiting and trading of these rights is called "cap & trade". 

Regulated companies must provide us with an annual emissions report detailing how much CO2 equivalent they have emitted. Strict monitoring plans and verification by accredited verifiers guarantee accurate acquisition of true emission data.

At the end of the cycle, emission allowances are surrendered equalling the reported and verified volume of emissions. If the participants do not fully comply, severe sanctions will follow.

National emissions trading

The national emissions trading system (nEHS) has a different approach: it compels fuel distributors to purchase pollution rights in the form of certificates (this method is called upstream emissions trading). In other words, they pay for the emissions that result from the subsequent combustion of the fuels after having been placed on the market.

The sectors involved can explain the different approaches of the two systems. The transport and heating sectors involve a large number of emitters, such as car drivers and home owners who use fossil fuels for mobility or heating.

The distributors are obliged to participate in order that the customers do not have to partake directly in national emissions trading. They then transfer the additional costs to the consumers. When prices rise, the incentive for end users to reduce their own carbon footprint will increase.

Currently, we are still in a fixed price phase. This means that the price of certificates is not determined by the market but is set politically. This phase will end in 2025, after which the price will initially be formed within a range and then, in the future, will be formed freely on the market - that is under the same conditions as in the EU ETS. Current price levels have only a minor impact on the consumer price. The increase in diesel, premium petrol and light heating oil is between seven and eight cents per litre, for natural gas, only 0.5 cents.

In national emissions trading, the amount of fuel placed on the market and the potential CO2 emission must also be reported. The DEHSt platform can be used for reporting this and the fuel-to-CO2-equivalents conversion. When there is no special situation, the energy tax declaration data suffices. A monitoring plan is only envisaged for the 2023 reporting year.

At a European level, an emissions trading system is expected to be introduced for those emissions not subject to the existing EU ETS from 2028 at the latest.

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Who can participate in emissions trading?

Participation in trading or choosing offsetting is open to all in both European and national emissions trading. The situation is different when it comes to the obligation to surrender and reporting as well as the entitlement to allocation. We openly welcome all private endeavours that contribute to climate protection, but we cannot reward them through the allocation of ‘certificates’ (emission allowances or emission certificates). Only operators, aircraft operators and fuel distributors are obliged to participate. The legal framework for this has been created by the Greenhouse Gas Emissions Trading Act (TEHG for the EU ETS) and the Fuel Emissions Trading Act (BEHG for the nEHS). This means that no ‘certificates’ can be issued for emission reductions from photovoltaic installations, hydropower plants or from afforestation of private forests. For information about when and who is obliged to trade emissions, please see our basic pages on the nEHS and EU ETS or the relevant legal texts.

Those who are not obliged to participate in one of the emissions trading systems and would like to offset unavoidable emissions can still do so voluntarily. The German Environment Agency offers a CO2 calculator for this purpose, and we provide information on the acquisition of emission reduction credits on the pages linked below. If you would like to actively contribute to climate protection, you can calculate the emissions of your next holiday, for example, using the CO2 calculator and purchase credits from one of many providers.

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What are (emission) certificates?

From a technical perspective, certificates are special tools designed to establish the identity of a person or to encrypt documents thus enabling secure transmission over the internet while maintaining legal validity.

The term emission certificate is usually used as an umbrella term for emission allowances, certificates in national emissions trading and also for older units that are no longer used. An emission allowance is a record in an electronic database, that is registry. A certificate is always held in an account and the account holder is the owner of that certificate.

European emissions trading: Within the European Emissions Trading System we speak of emission allowances and not certificates. An emission allowance (EA) enables operators or aircraft operators to emit one tonne of carbon dioxide equivalent. Participating companies receive a number of allocations free of charge, which are reduced annually (cap). If the allocation amount is not sufficient to offset emissions, the company must purchase additional allowances. Allowances can be traded among the operators (trade) and can be auctioned on the Leipzig Energy Exchange EEX. Unlike the Frankfurt Stock Exchange, emission allowances can only be procured through auctions on this platform. Because of this and the fact that their expiry date is finite, it is not possible to use certificates for speculative investment auctioning.

National emissions trading: In national emissions trading, distributors must purchase emission allowances (nEZ) for the potential greenhouse gas emissions of their fuels. These are also only valid for a limited time and must also be traded or purchased on the Leipzig Energy Exchange (EEX). A fixed price phase applies to the nEZs up to 2025, during which the prices are increased annually.

Voluntary offsetting: If certain activities with high emissions cannot be avoided, voluntary offsetting of greenhouse gases offers an option to offset emissions that have been generated. In this way, individuals, companies, or organisations can offset their remaining emissions and make an individual contribution to climate protection without being obliged to do so. To achieve this, the person whose activities cause greenhouse gas emissions finances certain initiatives with the result of reducing greenhouse gas emissions elsewhere. Various certificates can be procured for this purpose, but they are not eligible for subsequent trading.

All transactions are tracked in registries similar to online banking. Certificates from different trading systems cannot be mixed with each other.

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How can carbon leakage be prevented?

In a globalised world, there is a risk that companies will relocate investments or production to a country where no additional costs arise due to emissions trading. This would contradict climate protection because accompanying emissions would also be relocated. The risk of such an emission shift is called carbon leakage. There are different approaches in the EU ETS and in the nETS to address this risk aiming to prevent the relocation of production sites.

You can find more information about the various procedures on the thematic sites linked below.

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What happens to the revenues from emissions trading?

European and national emissions trading generated revenues of 13.6 billion euros in 2022. They are earmarked to flow into the Climate and Transformation Fund (KTF) and open up a new scope of government support for climate protection initiatives. They are also used to stabilise electricity costs in Germany on a proportionate basis, to pay out State aid on offsetting and to finance enforcement. The Federal Ministry of Finance annually publishes a detailed report on all revenues and expenditure.

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