(Bloomberg) -- Chancellor Angela Merkel plans to cushion drivers from steep increases in the cost of fuel by phasing in a carbon tax designed to persuade German drivers to embrace less polluting cars.
The government’s plan to extend a cap-and-trade system on greenhouse gases to the transport sector will add a little more than 1 euro ($1.10) to the cost of filling the average size tank, according to Bloomberg calculations based on European Union data. That cost will increase to a range between 4 euros and 6 euros starting in 2026.
“We’re starting at a very low price to get people on board,” Merkel told reporters in Berlin after announcing a 54 billion-euro package of measures designed fight climate change.
Germany’s Performance Against Emissions Targets
The policies are aimed at spurring a rapid reduction in greenhouse gases across Germany, which is on track to miss targets set under the 2015 Paris Agreement on climate change. Gasoline and diesel distributors led by BP Plc and Royal Dutch Shell Plc will be required to record the carbon content of their sales and buy allowances. Those costs would trickle down to what consumers pay at the pump.
For drivers, the costs look modest at first. Due to become law in 2020, the plan envisages oil companies paying a fixed price of 10 euros ($11) per ton of carbon dioxide starting in 2021. That translates to an additional 1.07 euros a gallon to fill the tank of an average car from Mercedes-Benz AG.
The cost of those allowances would trade within a price corridor of 35 euros to 60 euros a ton from 2026, according to a 22-page summary of plans released on Friday. That’s well above the cost of certificates in the EU Emissions Trading System, where permits used by energy-intensive industries and airlines closed at 26.53 euros a ton on Friday.
The Green party and environmentalists blasted the proposals, which they say will fail to alter consumption away from fossil heat and transport fuels.
The pricing is “a bad joke,” said Patrick Graichen, the director of the Berlin-based Agora Energiewende institute, which has advised the government in the past. The starting price of 10 euros per ton won’t have a deterrent effect on retail fossil fuel purchases, he said.
Merkel has no choice but to introduce stricter limits on greenhouse gases coming from transport, which accounts for 20% of the nation’s total emissions and has increased every year since 2012. Adding to fuel costs would prod drivers toward buying more efficient vehicles and embracing electric cars, which have been slow to sell so far.
About 480,000 electric and hybrid vehicles are on the road in Germany, well short of the target of 6 million that Merkel has set for 2030.
The measures will “make gasoline and diesel more expensive,” Germany’s MWV oil lobby group said. “The goal should rather be to make fuels cleaner than increasing petrol pump prices.”
The governing coalition’s blueprint shows that Germany needs several years to set up a market that would impose limits on emissions from heating and transport. A fixed initial price will function like a levy, generating predictable revenue for the government. It will also get consumers used to paying a little more to protect the environment.
“Starting like this creates a reliable price trajectory that allows citizens and companies to adjust to the system,” the coalition said in its plan.
The price corridor will ensure the program doesn’t encourage the very low prices suffered by the EU’s existing carbon market, the world’s biggest, during the past 14 years. It also protects against too-high prices that would hit the poorest most.
“It’s not a bad idea to start with a set price for a while,” said Jahn Olsen, a carbon analyst at BloombergNEF in London. “Whether or not it works when the price corridor opens depends on how ambitious they are with the cap. If there’s too much supply it will follow the floor. If there’s not enough, it will follow the roof.”
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