Ahead of the green game


German industry is not happy with the country’s environment minister. Following the European Union’s decision in December to launch a mandatory cross-border greenhouse gas (GHG) emissions trading market, Jürgen Trittin has set out what German firms see as unnecessarily high targets for reducing emissions.

Under the cross-border trading system – decided on by the European Union in December and the mainstay of its attempts to cut GHG emissions – companies will have the right to release a certain volume of carbon dioxide and other greenhouse gases into the atmosphere. These rights will be granted by EU member countries in the form of allowance certificates.

If a company produces more emissions than the pollution allowance it has been allotted, it will be able to buy rights from another company that is not using all its full allowance. Without those rights, fines of as much as €40 per metric tonne of emissions would be imposed until 2007, rising to €100 in 2008. The agreement is pending approval by the EU parliament, but is expected to be launched in 2005.

Job creation
Trittin says the agreement will create jobs, boost manufacturing in renewable technology and make energy-efficient German companies rich, as they sell emissions rights to their more polluting EU counterparts. Studies predict that growth in renewable technologies will be more than double that of traditional methods of energy generation. And such technologies have huge export potential.

A government study has also concluded that a 40% reduction of GHG emissions by 2020, combined with a phasing-out of nuclear energy, could create 200,000 jobs. Analysis and Assessment of a European Emissions Trading System for Germany, released in December by research institutions DIW, Öko-Institut and Ecofys, says the proposed trading system would save German companies as much as €500 million a year.

However, German industry sources believe too many questions surround the implementation of the system and that an obligatory scheme is not needed, as German has already succeeded in reducing its emissions through voluntary measures. Industrial firms see themselves as among the biggest losers from the government’s politically motivated goals.

Indeed, over the past decade, the German government has been at the forefront of environmental protection efforts (see box). And all evidence points to climate protection remaining a key element of government policy, at a domestic, Europe-wide and international level, for the foreseeable future.

Despite average annual economic growth of 1.5% from 1990 to 2000, Germany’s greenhouse gas emissions fell by 19%. And the government has pledged to reduce them by 21% from 1990 levels by 2012 – well above the 8% reduction required by the EU to fulfil its commitment to the Kyoto Protocol on Climate Change.

“Germany industry’s opposition to emissions trading was, at first, quite surprising,” says Nils Steinbrecher, head of the energy and climate change unit at ERM Central Europe, a division of business consultancy ERM Lahmeyer International. “But what they are really opposed to is the government’s decision to reduce emissions to 21% of 1990 levels.

“This is over and above its obligations under Kyoto, and they see it as an unnecessarily large reduction; an unnecessarily large burden,” says Steinbrecher. “They expressed their displeasure by criticising emissions trading, when in reality this is just one of the ways the government will reach its 21% target.”

But despite wide-ranging government assistance, German industry feels it has done its bit and that the rest of the EU must now catch up.

Joachim Hein, environmental expert at the Federation of German Industry, says Germany is already responsible for three-quarters of the EU’s overall reduction in emissions – which it wouldn’t have been achieved without German firms’ voluntary initiatives – and that therefore the country shouldn’t have to make further reductions.

More specifically, Hein is concerned that the EU decision that launched the trading system doesn’t specify a base date from which carbon reductions are to be calculated and pollution permits allocated. The whole of the EU must reduce emissions by 8% from 1990 levels, but how individual governments do it and whether they decide to use 1990 as the base level when allocating permits is up to them.

German companies fear that their past efforts will not be counted, in that a firm that has been reducing emissions since 1990 might find the government uses 1995 as the base year in determining the firm’s pollution limit.

Yet the government dismisses these concerns, saying that – environmental ambitions aside – it has no desire to adversely penalise its own industry. Trittin agrees that German industry has already made significant reductions and assures them that, as a result, they are likely to be winners from a cross-border system, through selling their polluting rights.

The environment minister also stresses that he negotiated exclusion rights for key sectors and companies until 2007. Each EU government is now free to decide that a certain industry sector needs more time to adjust, thereby exempting it from emissions trading until 2007. This is particularly significant for Germany because, of the estimated 4,500 industrial installations in the EU slated for inclusion in the system when it starts in 2005 – principally power plants, steel mills, cement plants and paper plants – more than half are in Germany.

But uncertainty over which sectors may be excluded – and when – makes firms jittery and holds back investment, says the Federation of German Industry. The devil remains in the detail, with too many questions unanswered for the industry’s liking.

If a German company wants to buy into a Dutch company, will it be liable for its emissions? And, if so, what will be used as the base year for the company it’s buying into? Will the German government decide on the base year for the Dutch company, or will that be up to the Dutch government?

And what about a foreign firm looking to invest in Germany in the next decade? It will want to know if it will be forced to join the trading system and whether it’s likely to be a buyer or seller of pollution rights. And will it be forced to join in 2005 or 2007? It will also want to know what is likely to happen after 2012. What about market newcomers? A power plant built in 2005 will have a head start over one built in 1985. Will the government take this into account?

ERM’s Nils Steinbrecher says: “All companies are assuming further reductions will be required, but there are few clues as to how this will be achieved. The government has a lot of options when it comes to cutting its overall emissions. Compulsory trading is just one possibility. Increasing renewable energy or expanding public transport are other ways they could meet their targets.”

And the government needs to set clear rules on how it will meet the targets, says Steinbrecher. “Investment will stagnate or drop until companies know more about the laws and liabilities they are likely to encounter,” he says. “Until it does, individual firms will worry that they will be treated unfairly and will ask for special treatment.”

Despite its record to date, there are limits to how much Germany is ready to lead the way on environmental protection. After 2012, it has said it would be willing, for example, to reduce emissions by 40% from 1990 levels, but only if the rest of the EU agrees to reduce its emissions by 30% from 1990 levels.

Head start
Nonetheless, a small but growing number of German firms, rather than just seeing the short-term penalties and transition costs, view their country’s sterling record on emissions reductions as having given them a head start when it comes to winning long-term business

Sascha Lafeld, head of research in Dresdner Bank’s corporate sustainability department, says his firm expects to benefit from taking part in a pilot emissions trading system with eight other companies in the northwestern Hessen district. “Advising companies on how to deal with emissions trading is a bullet point for us and one of the main reasons we got involved,” he says.

“There is also scope in the brokerage field, where banks could step in to create trading platforms and maintain liquid markets in emissions trading,” he adds. “Another opportunity that will probably arise in 2005 will be advising on insurance products and derivatives, perhaps for companies that fail to reduce their emissions and are subsequently fined.”

Certainly, industry opposition to the trading system seems more of a knee-jerk reaction to the unknown than a fundamental disagreement about its long-term viability. Industry commentators are confident that once the system is up and running, energy-efficient German firms will see how ahead of the game they are; they will realise that the new programme has little effect on their day-to-day running and in fact gives them a head start in a growing and lucrative market.

What has Germany done to reduce emissions?
The German government has used a variety of mechanisms to cut its carbon emissions. Wind power generation quadrupled to more than 10,000 megawatts between 1998 and 2002. Solar power generation and use of biomass are also being tested. Consumption of fuel in the transport sector decreased by 1.3% in 2000 compared to 1999, even though the transport infrastructure was expanded.

The government is also using taxes and subsidies. It recently adopted a new climate protection programme containing a bundle of new policy instruments. It has implemented an ecological tax, which aims to gradually increase energy prices in all sectors, in order to create incentives for rational and efficient use of energy and the market launch of new technologies.

Germany has also launched a Renewable Energy Act and two additional incentive programmes, which promote renewable power generation and new investments in solar heating systems. The government also hopes to slash emissions through its voluntary agreements with German industry. This seeks to reduce industrial emissions by 35% until 2012 compared to 1990 levels, aiming for an absolute reduction of 45 million tonnes of carbon by 2010 from 1998 levels and the reduction of CO2-emissions from combined heat and power generation by 23 million tonnes by 2010.

Direct regulation and subsidy programmes aim to cut the energy demand of new buildings by around 30% and substantially reduce the energy demand of existing buildings. A package of measures for the transport sector is also planned from this year, ranging from additional investment in railways, the promotion of fuel-efficient cars and a distance-based highway toll for heavy trucks.
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