Since 01.01.2021 a new national system on emissions trading has entered into force in Germany, based on the National Emissions Trading Act (BEHG). This will cause additional costs on the procurement of fossil fuels. To mitigate the expected disadvantageous effects on the German industry, on March 31, 2021, the German Federal Cabinet passed a “Carbon Leakage Ordinance” on the BEHG.
The regulation concerns users of fuels that belong to defined (sub)sectors according to the sector list of the EU ETS. Regarding the user, the regulation refers to the complex systematics of the German energy tax law. The financial compensation under the carbon leakage regime is linked to a counter-performance by the company, whereby the evidence for the counter-performance goes in two directions: On the one hand, factual information has to be verified by an auditor, and on the other hand, the counter-performance regarding energy efficiency has to be certified by an auditing body. This alone will cause a great deal of work for the applicants.
In addition, there will be a further regulation for hardship cases. But no draft regulation has yet been issued for the hardship provision yet. According to the explanatory memorandum to the law, undue hardship shall exist if there is “a stifling hardship” for the company that “makes economic activity impossible”. This is said to be fulfilled if users have fuel costs exceeding 20% of total business costs or a share of additional costs exceeding 20% of gross value added. Here, the national regulation refers to the Special Compensation Scheme under the German Renewable Energy Act (EEG) – including the well-known vagueness in the calculation of GVA and the demarcation of independent parts of the company.
How does the Carbon Leakage Regulation differ from the Hardship Regulation? On the one hand, with regard to the required consideration. On the other hand, the threshold of concern is defined differently. Due to the reference of the Carbon Leakage Regulation to the EU ETS, the context of the regulations under state aid law is also different.
Both regulations will cover different target groups. It is to be expected that in each case the group of beneficiaries will not be very large. In the case of the carbon leakage regulation, there is a reference to predefined sectors. In the case of the hardship regulation, the scope of application will depend on the specific business requirements, but a “stifling hardship” will not be easy to prove. Even below this threshold, companies, especially if they do not belong to the (sub)sectors, will face undue hardship.
Extensive application issues will arise from the Carbon Leakage Regulation. In principle, companies that do not belong to the list of sectors will not be entitled to a cap on emissions, unless they face undue hardship as a result of the CO2 pricing. This means that only companies with an above-average emissions intensity are relieved.
With regard to the practical scope, it is interesting to note that the electricity and energy tax legislators have also turned their attention to the Carbon Leakage Ordinance. When it comes to the question of how the future peak compensation of the manufacturing industry will look, which will expire on December 31, 2022 due to the state aid regulations, one can imagine a comparable regulation to the Carbon Leakage Regulation or to the Special Compensation Scheme under the EEG. From the point of view of the companies, it would be desirable for this to be in line.
The ordinance has to be passed in the Bundestag. As with energy taxation, companies that fall under the hardship clause or carbon leakage protection should be able to receive short-term relief. Currently, as with energy taxation, payments during the year are not possible. Applications for carbon leakage protection can be made up to June 30 of the following year, but no earlier than the beginning of the year. As a result, companies sometimes have to temporarily finance charges arising from the Carbon Leakage regulation for more than 15 months before they are partially relieved.
The list of sectors has not been extended in the text now adopted. As a result, numerous sectors still do not know whether they will be eligible for the relief. The subsequent inclusion of additional sectors on the carbon leakage list remains possible, but quantitative criteria must first be met there before sectors are allowed to fall back on qualitative criteria to justify their being affected. Due to a lack of data and fixed timelines for retrospective inclusion, industries face enormous challenges in submitting a successful application. Further complicating matters is the fact that only one application may be submitted per industry, and there are hard requirements as to whom the applicant must represent – regardless of whether there has been any corresponding representation of interests in this area to date. Here, more thought should be given to finding better solutions for the industry.
Responsible for energy regulation and green tax at one of Germany’s largest tax firms.
Expert supports large companies, domestic and multinationals, on their way towards a carbon free energy supply: power price reductions, energy tax, power plant projects, compliance, digitalization of processes and any kind of issue connected with the energy transition (German Energiewende).
-Expert is a lawyer, but for many years worked for the German Stadtwerke Association and also in investment banking.
-An Expert in Energy Tax, Electricity Tax (compliance and operational), Grid Regulation, Investment Regulation, EU Energy Law, Cross Border Regulation.