Carbon pricing and CO₂ cost allocation in the buildings sector: the Carbon Dioxide Cost Allocation Act
The debate over introducing carbon pricing in the German buildings sector endured for several years at the technical level before politicians seized upon the idea and put it into practice. The Federal Government’s Climate Protection Programme 2030) for the implementation of the Climate Action Plan stipulates that Germany should emit 55 per cent less greenhouse gases by 2030. To achieve this CO₂ emissions will have to be cut across all sectors. Various laws are preparing the ground here. These include the Carbon Dioxide Cost Allocation Act, which we shall be focusing on in the present article.
What the Climate Protection Act says
Pursuant to the amended Climate Protection Act (Klimaschutzgesetz, KSG) Germany must achieve greenhouse gas neutrality by 2045. The KSG also prescribes a 65% reduction in German greenhouse gas emissions by 2030 as compared with 1990. In addition, the Act lays down sectoral targets, with buildings still allowed to emit 67 million tonnes of CO₂e (CO₂ equivalents) in 2030, representing a reduction of 68% as compared with 1990. The situation is different in the energy and industrial sectors, where carbon pricing has been in place since 2005 through the European Emissions Trading System (EU ETS).
The idea behind the Fuel Emissions Trading Act
In order to include other sectors in the carbon pricing system, the Fuel Emissions Trading Act (Brennstoffemissionshandelsgesetz, BEHG) was passed in 2019. Under this Act, a national emissions trading system (nETS) has been running since 2021, which includes all fuel emissions not covered by the EU ETS. Until 2025 the nETS will operate as an emissions trading system with annual increases in fixed CO₂ prices, rising from 25 euros/t in 2021 to 45 euros/t in 2025. In 2026 a price corridor of 55 to 65 euros/t CO₂ will apply. In November 2022 the BEHG was amended to postpone the next price increase in the nETS by one year from 2023 onwards. The current price is 30 euros/tonne of CO₂, a figure which is set to rise to 35 euros/t on 1 January 2024 and 45 euros/t on 1 January 2025.
The problem of cost allocation
Whereas the last grand coalition (2017-2021) decided upon and passed the BEHG, despite intensive discussions between the CDU/CSU and the SPD no separate provisions were adopted on how the resulting buildings sector CO₂ costs should be apportioned among the actors involved, namely landlords and tenants. Although the federal government reached agreement on a proposal, the CDU/CSU parliamentary group in the Bundestag refused to toe the line at this point, and rejected the cabinet proposal.
As a result the issue dragged on into the 2021 federal election campaign, with the ‘traffic light parties’ (the SPD, FPD and the Greens) entering into a coalition agreement at the end of 2021 which stated that they wanted to arrive at “a fair division of the CO₂ price to be paid in addition to heating costs, between landlords on the one hand and tenants on the other”. This is the central basic idea of the CO₂ Cost Allocation Act. The aim was to implement it by mid-2022 via a graduated model according to building energy classes, designed to govern the allocation of the CO₂ price pursuant to the BEHG.
Objectives of the Carbon Dioxide Cost Allocation Act
The central purpose of the Carbon Dioxide Cost Allocation Act (Kohlendioxidkostenaufteilungsgesetz, CO2KostAufG) is to govern the fair division of CO₂ costs between tenants and landlords. Although there was some delay in its implementation, it has now been in effect since December 2022. The aim of the Act is to encourage tenants and landlords alike to save energy. It also prevents landlords from passing on the entire cost of carbon pricing to tenants.
The basic idea behind this is to encourage tenants to reduce their energy consumption, and landlords to improve the energy efficiency of their residential complexes. The latter includes both adequate insulation and climate-friendly heating systems. Such measures should contribute towards achieving the main underlying objective of climate neutrality by 2050.
The Act put in place ten-step model for residential buildings, regulating the allocation of costs. The basis for the gradation is the building’s energy efficiency, as determined by its carbon dioxide emissions per square metre [of living space].
Under this step-by-step model for residential buildings, since the beginning of this year the CO₂ costs for oil and gas heating systems have been allocated to landlords and tenants on the basis of the building’s energy efficiency . The more energy a building consumes per unit area, the greater the landlord’s share of the CO₂ costs will be. In the first instance the cost will be paid by the “introducer” of the energy, meaning either the gas or heating oil supplier. They then pass the costs on to their customers. The extent of the extra cost payable by the customers also depends on the volume of greenhouse gases emitted by the respective energy source.
The aim of the graduated model for residential buildings is ensure a fair division of costs between landlords and tenants. The poorer a building’s energy efficiency, the greater the CO₂ cost share allocated to the landlord. The better a building’s energy efficiency, the lower the share assigned to the landlord. The allocation is based on CO₂ emissions per square meter of living space per year. Landlords work out the CO₂ costs and the allocation key when drawing up the annual heating cost statement.
How are the annual heating costs calculated?
It is easy to forecast the costs using KALO’s CO2 cost calculator for residential buildings. The general rule applied is that, even if tenants obtain their own heat and hot water directly from suppliers, the landlord must reimburse them for the corresponding share of the CO₂ costs. The reason for this is that, unlike owners and landlords, tenants are not in a position to choose to undertake energy-efficient renovation work, for instance involving modernising the building technology or upgrading the building envelope. Depending on the building’s energy efficiency, the landlord’s share of the costs may range from 0 per cent (for the most efficiently renovated buildings) to 95 per cent (for completely unrenovated buildings).
As always, there are some exceptional individual cases, such as listed buildings and milieu protection areas, where the landlord’s share of the costs is halved or even waived entirely. For non-residential buildings, the CO₂ price will initially be halved, but by the end of 2025 a graduated cost-sharing model will also be developed for non-residential buildings.
Who else is affected by the Carbon Dioxide Cost Allocation Act?
From now on, this Act will apply to all landlords who use fuels in separate or connected systems to produce heating for their residential and commercial properties. Accordingly, they will be obliged to meet part of the CO₂ costs. The Act also comes into force with respect to the independent commercial supply of heat and hot water, as well as for the supply of heat from heat generation plants incorporated into the European emissions trading system. The provisions have applied since 1 January 2023. Any costs that have been determined previously are disregarded here.
Suppliers’ obligation to provide information
Pursuant to the CO2 Cost Allocation Act, when delivering fuel suppliers are obliged to give a clear indication of the following information on the relevant invoice:
- The fuel emissions that the delivery will produce, in kilograms of carbon dioxide.
- The carbon dioxide cost as a component of the price for the quantity of fuel supplied or used at the time of delivery.
- The emission factor in relation to the calorific value of the fuel supplied or used, in kilograms of carbon dioxide per kilowatt hour.
- The energy content of the fuel supplied or used per kilowatt hour.
- An indication of the reimbursement claims. (article 6 (2) and article 8 (2))
What happens if the costs are not shared?
If the above information is not given on the invoice, or if the CO₂ costs are not shared between the tenant and the landlord, tenants are entitled to reduce their share of the heating bill by three per cent.
What future effects will the CO₂ Cost Allocation Act have?
As outlined above, initially the CO₂ price will continue to rise until 2025 in line with the BEHG. However, details of specific price movements from 2026 onwards remain unclear.
Meanwhile, at EU level the so-called EU-ETS II will be introduced. From 2027 onwards this will cover previously non-ETS sectors, which includes the buildings industry. Precise details of ETS II have not yet been published, but it has already been announced that, due to their social impact, prices in the buildings sector of 45 euros per certificate or more will be cushioned by a new social climate fund, while at the same time achieving the EU emission reduction target of 55 per cent lower greenhouse gas emissions (GHG) by 2030 as compared with 1990. EU member states will be paying 65 billion euros into this fund to cover the period from 2026 to 2032. The chief purpose of the fund will be to support measures and investments designed to achieve more energy efficient buildings and lower-emission mobility.