What should a metric ton of CO₂ cost?

The shorter the supply of a commodity, the higher its price. For greenhouse gas emissions, the opposite is the case. They are available in abundance – particularly in the atmosphere. However, the aim must be to avoid emissions. So, if they come at a cost then the incentive to meet this goal is much higher.

Some emissions already come with a price tag. Under the European Emissions Trading Scheme (EU ETS), electricity producers, energy-intensive industries and commercial airlines are committed to purchasing certificates for their emissions. Currently, an emission allowance for one metric ton of CO₂ or an equivalent gas costs around 25 euros.

There are other emissions trading systems across the world, too. But none of them apply to all fumes. And yet, one metric ton of carbon dioxide, or rather the equivalent amount of a different greenhouse gas, always has the same effect on the climate – no matter if it comes from a factory, the exhaust pipe of a car, the chimney of a residential building or the bowels of a cow. But only select emitters and their customers are made to pick up the tab.

The Swiss show how it’s done

This particular issue has sparked a debate in Germany. The crux of the matter is the expansion of greenhouse gas emission pricing, but how this is to happen is, as of yet, unclear. One solution could be a national CO₂ tax for fossil fuels. Christoph M. Schmidt, Chairman of the German Council of Economic Experts, has suggested an initial fee of 20 euros per metric ton of CO₂, which is to rise with time.

However, there are also other opinions. The German government stresses social and economic factors: If petrol, diesel and heating oil become more expensive, then this will hit low-income households twice as hard, given that the combination of their lower income and the fact that their homes are often less insulated, meaning heating accounts for a higher proportion of their household bills, leaves them at a disadvantage.

Switzerland has been levying a similar CO₂ tax since 2008, and the nation also considered similar concerns – especially given that the Swiss pay 96 francs, about 84 euros, per metric ton of carbon dioxide. As such, in order to cushion the social hardship blow, the Swiss tax authorities refund two-thirds of the deductions to the public as a monthly per capita lump sum. The rest is used to subsidise building renovation, for example. In Germany, there is talk of reimbursing the full amount. As such, those emitting less CO₂ than average would in fact end up making money.

More expensive fuels, cheaper power?

According to the German government, an additional burden due to the CO₂ tax is to be avoided at all costs. As such, rather than refund deductions directly, there is also talk of abolishing the electricity tax and the renewable energy levy. This means that electricity prices for consumers in Germany would be among the highest in the EU, however generation costs would be among the lowest. Both would mean power would initially become cheaper, whilst driving and heating would become more expensive.

The more uniform pricing structure would indicate where greenhouse gas emissions are produced. The idea is for people to adapt their consumer habits accordingly: leave their cars at home more or drive slower, make do with the heating set to one degree lower in winter or invest in thermal insulation.

Difficult, but efficient: global certificate trading

However, critics believe national carbon pricing is problematic. On the one hand, they argue that Germany plays a relatively moderate part in contributing to the global climate goals, as it is. On the other hand, they reason that it would place a burden not only on consumers but also on German companies.

It terms of global competition, this could make Germany less attractive as a business location. If this were to damage the economy, Federal Economics Minister Peter Altmaier said in a recent tv interview, then this would send the wrong signal to other governments: “Then China or India would not adopt these measures, which would do the climate a disservice.”

Schmidt would also prefer international solutions. Specifically, he advocates extending European certificate trading to other sectors – and preferably to other countries as well. “Comprehensive global coordination would be the best case scenario”, Schmidt said in Handelsblatt in late April. Then disadvantaged companies needn’t be allocated compensation for additional burdens: “The more countries participate, the less compensation is needed.”