Allocation of CO₂ costs between tenants and landlords: What property owners need to know

Why heating with fossil fuels is becoming more expensive

The basis for CO₂ pricing is the Fuel Emissions Trading Act (BEHG), which was passed in 2019 as part of the German government’s climate protection programme. It obliges suppliers of fossil fuels – that is, energy suppliers – to purchase CO₂ allowances. These costs are passed on along the supply chain and effectively increase heating costs for buildings using natural gas, heating oil or liquefied petroleum gas.

The CO₂ price – often colloquially referred to as the CO₂ tax – rose gradually from 25 euros per tonne when it was introduced in 2021 to 45 euros (2024) and 55 euros (2025). For 2026 and 2027, a price corridor of between 55 and 65 euros per tonne of CO₂ applies, as the fixed-price phase has expired and emission allowances are now being auctioned. The specific details of the future arrangements are still under political discussion.

This price trend is the reason why the allocation of the CO₂ tax between tenants and landlords is becoming increasingly important for property owners.

The aim is clear: fossil fuel heating systems are set to come under economic pressure. Those who invest early in energy efficiency and renewable heating, however, can avoid these rising costs.

The CO₂ Cost Allocation Act (CO₂KostAufG): Legal Framework for the allocation of CO₂ costs between tenants and landlords

Since 1 January 2023, the CO₂ Cost Allocation Act (CO₂KostAufG) has governed the allocation of CO₂ costs between tenants and landlords as set out in the heating bill. The basic principle is that whoever has influence over a building’s energy efficiency should also bear a proportionate share of the CO₂ costs. As landlords make decisions regarding modernisation measures, heating systems and the building envelope, their share of the costs increases as energy efficiency decreases.

The Act applies to residential buildings with central heating that are heated using fossil fuels – natural gas, heating oil, liquefied petroleum gas or district heating containing fossil fuel components. Buildings heated exclusively by renewable energy sources such as heat pumps or biomass (e.g. wood pellets, wood chips) are not affected. Special provisions may apply to smaller or listed buildings, or to existing buildings and refurbishment projects with proven constraints.

How the 10-step model for CO₂ cost allocation works

For residential buildings, CO₂ costs are allocated using a 10-tier model. The decisive factor is the annual CO₂ emissions per square metre of living space – calculated from the measured fuel consumption and the emission factor of the respective energy source. The higher the specific CO₂ emissions, the greater the share of the costs borne by the landlord.

The scale of this is deliberately steep: for highly efficient buildings (under 12 kg CO₂/m²/year), all CO₂ costs are borne by the tenants. In the case of very inefficient buildings (52 kg CO₂/m²/year or more), the landlord covers 95 per cent. This significantly strengthens the financial incentive for refurbishment – particularly as the absolute amount increases in line with rising CO₂ prices.

Landlords calculate CO₂ emissions by multiplying the annual fuel consumption (in kWh) by the fuel’s emission factor – for natural gas, for example, around 0.201 to 0.202 kg CO₂ per kWh – and dividing this by the total living area. The result, in kg CO₂/m²/year, determines the relevant share.

Which energy sources are affected by the CO₂ cost allocation?

The CO₂ cost allocation applies to all buildings heated using fossil fuels: natural gas, heating oil and liquefied petroleum gas are all covered without exception. In the case of district heating, the law applies provided that the heat supplier reports a fossil CO₂ component – which is the case for the majority of German district heating networks. District heating suppliers are obliged to state the relevant CO₂ factor for their network on the bill. If this information is missing, the statutory default values may be used instead.

Buildings supplied exclusively by renewable energy sources – i.e. heat pumps, wood pellets, wood chips or other biomass systems – are not affected. Anyone who has already stopped using fossil fuels is therefore not affected by the CO₂ Cost Allocation Act (CO₂KostAufG) in any way.

How CO₂ costs are calculated in practice

The fuel supplier provides the basis for the calculation: they itemise the CO₂ costs in their bill. On this basis, landlords or appointed billing service providers determine the relevant landlord’s share – depending on CO₂ emissions, living space and the corresponding level of the 10-level model.

For larger housing portfolios with varying levels of renovation, this calculation is complex: each building may fall into a different tier, and billing periods and consumption data must be reliably available. In practice, this is often handled by specialist metering service providers and billing companies, which integrate CO₂ allocation, heating cost billing and building classification into a single process. The quality of the underlying consumption data is crucial here – incomplete or delayed data increases the risk of billing errors and legal disputes.

What obligations landlords must fulfil when settling heating bills

Landlords are legally obliged to show CO₂ costs transparently in the heating bill. The bill must show the CO₂ costs incurred, the building’s energy efficiency rating, the basis for calculation, and the respective shares of the costs borne by the tenant and the landlord. If any of this information is missing or if the calculation is not transparent, tenants may reduce their share.

For housing companies with large portfolios comprising properties of varying energy efficiency, this significantly increases the organisational burden. Data collection, documentation and ensuring that billing complies with the law must be carried out on a building-by-building basis – and repeated every year. Relying on analogue processes in this area leads to inefficiencies. Digital data collection and billing systems have long been an operational necessity.

Special case: gas-fired central heating

In flats with individual gas heating, tenants usually enter into the gas contract directly with the energy supplier – the CO₂ costs initially appear in full on the supplier’s bill. The tenant must then claim the landlord’s share back from the landlord. To do so, they must provide evidence of consumption figures, CO₂ costs and living space. The process is more cumbersome than with central heating, where the landlord has direct access to the billing data – and requires clear agreements between the tenant and the landlord.

Furthermore, reduced landlord contributions may apply in certain circumstances: for example, in listed buildings, properties subject to environmental protection requirements, or in cases where renovation measures are restricted by building regulations or official requirements.

Why rising CO₂ prices are transforming the housing sector in the long term

What currently appears to be a manageable cost item will become a significant factor in the medium term. With the transition to market-based emissions trading from July 2026, the political price cap in place during the fixed-price phase will be lifted. The price of CO₂ may become more volatile in future – and, on average, lie significantly above previous levels.

For housing companies with inefficient building types, this means that the proportion of costs they must bear themselves will rise – without tenants seeing any relief. CO₂ costs are thus evolving from a billing item into a strategic investment signal. Anyone planning energy-efficiency refurbishments would be well advised to explicitly include the CO₂ costs to be avoided in future in their profitability calculations.

The role that digital data and billing systems will play in the future

The CO₂ Cost Allocation Act (CO₂KostAufG) presents housing companies with a requirement that goes beyond mere billing procedures: the correct classification of each building within the 10-tier model requires reliable and up-to-date consumption data. If this data is missing – or if it is incomplete, inconsistent or collected manually – a billing risk arises.

Digital consumption recording, automated monitoring and standardised building data are essential for legally compliant and efficient billing. Those who equip their property portfolio with a robust database at an early stage reduce sources of error, ensure transparency for their tenants – and are simultaneously better prepared for future reporting obligations, such as those arising from ESG or CSRD requirements.

Conclusion: CO₂ costs as a strategic signal

The CO₂ Cost Allocation Act (CO₂KostAufG) is not merely a billing law – it changes the economic logic of the building stock. In future, inefficient buildings will place a burden not only on tenants through high heating costs, but also directly on owners through rising CO₂ cost shares. As certificate prices rise, this effect will intensify.

For property owners, this provides clear guidance: energy-efficiency refurbishments are increasingly a financial necessity. Those who have a thorough understanding of their own buildings – their energy consumption, CO₂ performance indicators and billing accuracy – and manage them systematically will not only be compliant with the law but will also enjoy a long-term economic advantage. Those who understand the rules governing the allocation of the CO₂ tax between tenants and landlords today, and incorporate them into their own refurbishment strategy, will secure a tangible economic advantage tomorrow.