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Natural Environment

Who carries the cost of carbon pricing?

Germany has led calls for an EU “green new deal” targeting net-zero carbon emissions by 2050. But how can the continent’s largest economy meet its own obligations?

Dr Matthias Morgernstern
17 December 2019

A German language version of this piece appeared on in September. Read it here

Germany's long-term goal is to be largely greenhouse gas-neutral by 2050. The building sector will have to provide a substantial contribution to this goal.

It is clear that substantial carbon gains have already been achieved in new construction projects. It is in the existing building stock that the greatest scope exists for the sector to contribute to the realisation of Germany's climate goals.

Alongside regulatory, tax and subsidy-related measures, CO2 emissions pricing (essentially, levies on the use of fossil fuels) could be a vital tool, if designed in such a way as to incentivise further the decarbonisation of the building sector.

But questions remain as to how such a scheme could be responsibly designed.

Carbon pricing is frequently seen as representing the purest version of the "polluter pays" principle, but it's not always a straightforward task to identify exactly who the polluter is. In cases where a building's occupier and owner are not the same entity, who is culpable for the carbon footprint?

Carbon pricing could help accelerate the realisation of Germany's long-term emission goals

Tenants are not responsible for the poor energy performance of buildings, when that performance is a consequence of flawed design. Equally, landlords cannot be held accountable for the consumption patterns of their tenants.

Germany traditionally has a low rate of home ownership. This means that the direct carbon pricing of fossil fuels used for heating purposes will have a sociopolitical impact. People with below-average incomes frequently live in cheap buildings with a poor energy performance and would therefore be disproportionately affected.

Mandatory upgrades to poorly performing housing stock, without accompanying tax, tenancy or other financial incentives, could further aggravate the landlord/tenant dilemma, with increased rental prices one potential upshot.

As such, in addition to the direct carbon pricing of energy sources and an expansion of certification schemes to include the building sector, property tax compromises may be necessary.

Other proposals include blazing a trail through the jungle of subsidies, charges and taxation in the area of energy sources. The basic principle is not to subsidise renewable energy and instead to ensure that fossil fuels reflect the actual follow-up costs of CO2 emissions. In addition to potential simplification, these concepts offer the advantages of transparency and deregulation.