Climate Levy for Conventional Power Plants Remains Controversial Despite Softened Proposal

Plans by German Energy Minister Sigmar Gabriel (SPD) to impose a climate levy (Klimabeitrag) on CO2 emissions of conventional power plants to reach the government’s political goal of reducing CO2 emissions by 40% by 2020 remain controversial. Despite a proposed lowering of the electricity industry’s additional reduction target from 22 million tonnes to 16 million tonnes, RWE and Vattenfall as well as members of the Conservatives continue to oppose the plan. We continue to doubt that the proposed climate levy will be compliant with European and German constitutional law.

1. New Proposal

According to media reports, the energy ministry is willing to soften the initial proposal following strong opposition from various sides, including utilities with lignite-fired power plants, like RWE and Vattenall. Both would be very much affected by the levy (regarding the initial proposal, please see here).

Information on details of the proposal remains limited. The revised proposal appears to include the following:

  • New CO2 savings target for conventional power plants of 16 (instead of 22) million tonnes by 2020;
  • Under the old proposal the levy applied to power plants older than 20 years. As of the 21st year a levy of about EUR 18 to 20/t CO2 should apply for emissions exceeding 7 million tonnes (so-called “free amount”).  This free amount decreased to 3 million tonnes in the 41st year of operations from whereon it should remain stable. Now allegedly a free amount of 3.8 million tonnes shall apply as of the 37th year of operations;
  • The climate levy shall be pegged to the electricity price, decreasing when the electricity price decreases;
  • Besides the levy shall be linked to the price of European emission allowances (which operators of power plans have to hand in anyway), falling “to the extent that the European Emission Trading System becomes functional again” (In view of the German government prices for emission allowances are too low to incentivise sufficient investment in green technology);
  • For special cases hardship clauses shall make sure that the climate levy does not lead to plant closures;
  • The ministry wants to review if lignite-fired power plants with a capacity of 1 to 2 GW can be included in a “capacity reserve”.

As the original 22 million tonne savings target was part of the government’s Climate Action Programme that contains measures to help reach the government’s (political) CO2 emission’s saving goal of 40% by 2020, the new proposal by the Energy Ministry contains suggestions to save the remaining 6 million tonnes of CO2 (22 millions minus 16 million tonnes equals 6 million tonnes).

  • 4 million tonnes of CO2 shall be saved by increasing support for CHP plants not only from EUR 500 million per year to EUR 1 billion as originally planned, but to EUR 1.5 billion. This would however lead to an increase of the CHP surcharge for consumers from 0.25 ct/kWh to 0.75 ct/kWh. Besides, CO2 shall only be reduced if old hard-coal fired power plants will be replaced by new gas-fired power plants;
  • The other 2 million tonnes of CO2 shall be saved in the transport sector.

2. Opposition Against New Proposal

According to Handelsblatt, RWE and Vattenfall still reject the proposal. We are generally against a penalty tax, even if it was pegged to the electricity price”, Handelsblatt quotes Vattenfall’s CEO Magnus Hall as saying. Opposition also comes from Conservatives like CDU member Thomas Bareiß, spokesman for energy for the CDU/CSU parliamentary group. “We are in favour of the national and international climate protection goals, but oppose a unilateral burden for the national electricity market, for example by a climate levy on lignite”, Rheinische Post quotes him as saying. On the other hand, the new proposal is criticised as being to weak.

3. Legal Concerns

The new proposal does not change our legal concerns based primarily on EU and German constitutional law.

The proposal still interferes with the merit order, targeting primarily old lignite-fired power plants and to a lesser extent old hard-coal fired plants, as power plant owners would be obliged to pay the climate levy once CO2 emissions exceed the free amount, which will effectively increase production costs, or else have to stop operations. Yet operators already have to buy emission allowances under the European Emission Trading Scheme (EU ETS). Besides, they have to observe existing environmental restrictions contained in their immission control law permits. While the new proposal lowers the burden for operators somewhat it still makes them pay twice or more for every tonne of CO2 that exceeds the free amount, as they would have to pay for the emission allowance and on top of it have to pay the climate levy. Besides, the new proposal would still invalidate the existing immission control law permit to a large extent. Also, it remains to be seen if and how reported softening (including hardship clause) will really alleviate proportionality concerns if the aim remains to effectives force certain coal capacity out of the market.

4. Factual Concerns

Factual concerns against the climate levy were expressed yesterday by the President of the German Cartel Office at a meeting of energy lawyers in Düsseldorf.

The climate levy would have an effect on the merit order, he said, leading to less competition. Besides, it would be difficult to devise it in such a way that it would work properly.

5. Next Steps

Prior to the COP 21 meeting in Paris later this year, climate change is high on the political agenda, to limit global warming to 2° C over pre-industrial levels. At the sixth Petersberg Climate Dialogue this week, Chancellor Merkel and French Premier Francois Hollande demanded an end to “fossil pollution”, saying they wanted to decarbonise the global economy over the next century. Chancellor Merkel reiterated her political aim to reduce German CO2 emission by 40% until 2020 (compared to 1990), and by 80 to 95% by 2050. This is above and beyond the current European (political, not legal) aim to reduce CO2 emission by at least 40% until 2030.

It remains to be seen if and how the Ministry of Economic Affairs and Energy will proceed with its climate levy proposal to start its coal power exit project for targeted reduction of CO2. After the nuclear power exit (with an unlawful moratorium and pending proceedings covering compliance with German constitutional law, state liability, European law, and the Energy Charter Treaty), it looks like additional costs to exit coal shall be incurred and new legal battlegrounds will be opened.

Sources: Rheinische Post 21 May 2015, page B1; Handelsblatt; klimaretter.info

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