Both the Netherlands and Germany are about to propose major new national climate measures. If the proposals become law, they will enforce some of the most stringent national targets for GHG reductions in the world. It’s why, on 22 August, Dutch Prime Minister Mark Rutte will host a meeting with German Chancellor Angela Merkel and her ‘climate cabinet’. Coordinated Dutch-German climate action can make these neighbouring countries role models for Europe and beyond, argue Jan Frederik Braun at The Hague Centre for Strategic Studies, Michael Pahle at the Potsdam-Institute for Climate Impact Research, and Mart van Bracht at Topsector Energy. The authors’ focus includes the Emissions Trading System (ETS) and carbon taxes, CCS, storage technologies and hydrogen. They explain how the European-wide deployment of such vital transition technologies will depend on laws that deliver clear and stable market signals.

On 22 August, Dutch Prime Minister Mark Rutte will host a meeting with German Chancellor Angela Merkel and her ‘climate cabinet’ (1). Both countries are about to propose and agree upon major new national climate measures.

In June 2018, a Dutch parliamentary majority presented a legislative proposal for a climate law with a greenhouse gas (GHG) reduction target in line with the Paris Agreement. Germany is going to present a similar proposal in September. If both proposals become law, they will codify two of the most stringent national targets for GHG reductions in the world.

These measures will force both countries to spearhead efforts that are needed for the deep decarbonisation of Europe and a European Green Deal.

Coordinated Dutch-German climate action is critical for Europe for three reasons:

1. Europe needs to move towards a uniform carbon price. Extending the European Emissions Trading System (ETS) to all sectors in all member states should be the primary objective of EU climate-policy. Coordinated interim solutions by Germany and the Netherlands could initiate a policy pathway towards implementing such a uniform price (2).
2. Within the EU there is practically no research and innovation (R&I) investment in potential game changers at the scale required for Europe’s deep decarbonisation: (i) carbon capture and storage (CCS); (ii) electrochemical or alternative storage technologies; (iii) and the large-scale production and storage of clean electricity with hydrogen. Germany and the Netherlands are, to a greater or lesser extent, engaged in scaling up efforts in all three fields.
3. Clear and stable market signals such as a minimum price on carbon that increases over time in all sectors of the economy will accelerate the European-wide deployment of these technologies. The Netherlands and Germany could become role models for this approach.

Joint Dutch-German carbon pricing would prevent potential ‘carbon leakage’ of Dutch companies transferring carbon-intensive industrial production to Germany for reasons of costs and laxer emission constraints (3). It would also limit the displacement of emissions to the Netherlands from the planned coal phase-out in Germany in terms of ‘rebound’ and ‘waterbed’ effects (4).

At the moment, both countries are on divergent pathways as they plan to introduce national carbon pricing measures with a focus on different sectors of their respective economies.

Dutch climate agreement

In order to flesh out the proposed climate law, the Netherlands has released an ambitious new climate agreement. In line with ‘Paris’, the agreement aims to reduce CO₂ emissions via national reduction goals of 49% by 2030 and 95% by 2050, compared to 1990.

In order to achieve these ambitious targets, the Dutch climate agreement introduces measures such as:

• A national CO₂ minimum price for the power sector. With a margin below the EU ETS price path, the Dutch CO₂ price starts around 12 EUR per tonne of CO₂ in 2020 and rises to approximately 32 EUR in 2030; well below the estimated ETS price of 46 Euro’s in that same year. At the same time, the Dutch aim for a CO₂ minimum price variant on the regional level, i.e. with France, Belgium and Germany. Once established, this regional price path would be leading.
• A national CO₂ charge for the Dutch industry on top of the ETS price. This charge is expected to start in 2021 at 30 EUR per tonne of CO₂ and increase to 125-150 EUR per tonne of CO₂ in 2030, including the ETS price. A direct consequence of the CO₂ charge is that the tax burden on energy use for the Dutch industry is higher than in, for example, Germany.
• Cost reduction of new technologies, with CCS, i.e. subsidizing the latter in places where there are no demonstrable cost-effective alternatives at that time and with a ceiling of 7.2 Mton of CO₂ up until 2030.
• Multi-year R&I programs that support the interweaving of sectors and provide the Netherlands with an international frontrunner position in fields such as sustainable hydrogen production and the electrification of industrial heat processes (power-to-heat) (5)

Germany’s upcoming climate law

Germany is in the midst of a political debate on realigning its climate policy in preparation of a new climate law to be adopted by the end of the year.

At the heart of the debate is how the country should introduce a price on carbon emissions in the sectors currently not covered by the ETS, such as transport and buildings, and for which each EU member state must reach annual reduction goals.

Germany’s GHG emission reductions have stalled in these non-ETS sectors. Therefore, the country is at risk of missing its binding EU 2030 target, which could translate into an additional eight billion Euro burden on the federal budget for the years 2021-2030.

Major controversial decision points are the choice of the instrument and the envisaged role of the European policy framework. The decisions will rely on studies commissioned by the Federal Environmental Ministry (BMU) and the Chancellery. The studies commissioned by the BMU analyse a carbon tax until 2030, which is the preferred instrument of the ministry. Perspectives for the carbon tax after 2030 and how it fits into the European climate policy landscape are not considered.

Commissioned by the Chancellery, the study by the German Council of Economic Experts, and the one by the Mercator Research Institute on Global Commons and Climate Change and the Potsdam-Institute for Climate Impact Research, call for a joint EU-wide instrument covering all sectors after 2030.

Both studies emphasize that for the interim period, both a CO₂ tax and a national emission trading scheme could be suitable instruments, if properly designed. Furthermore, an important step towards eventually reaching an EU-wide policy is regional cooperation, for example with the Netherlands. This idea is gaining increasing attention in the German debate that a regional minimum carbon price could substantially limit the emission leakage effect of the Germany coal phase-out to neighbouring countries.

In accordance with the Dutch climate agreement, Germany’s industry acknowledges that the selective use of CCS is necessary to eliminate process emissions in steel and cement production, steam reforming, as well as emissions from refineries and waste incineration plants.

Dutch-German-> European cooperation

The message for the Dutch-German climate summit on 22^nd August is clear: (i) create stable market signals such as a minimum price on carbon from Germany, the Netherlands and more like-minded countries, and one that increases over time in all sectors of the economy. This will accelerate the European-wide deployment of low-carbon technologies and; (ii) clear the pathway towards an ETS for all sectors (Figure 1).

This requires Dutch-German coordination on their new national climate measures, for example:

• Harmonize carbon prices ‘on top of the ETS’ and implement joint complementary technology/industrial polices in the power and industry sector. A complementary option already pursued in the Netherlands is to broaden the existing renewable subsidy scheme which supports the roll-out of CO₂-reducing measures in the industry sector.
• In advance of a regional CO₂ minimum price for the power sector, Germany should implement a minimum CO₂ price and the Netherlands should increase its price level towards around 40 EUR per tonne in 2030, i.e. the approximate level required to meet Germany’s climate target in the power sector. This could also make the country’s plan to phase-out coal plans through direct control obsolete.
• Industry sector: Develop joint R&D roadmaps for large/scale production and transportation of CO_2, hydrogen and ammonia.
• Market-enabling institutions could be created to coordinate and implement the construction of a CCS infrastructure that uses storage sites in the Netherlands to bypass the technology’s acceptance problem in Germany. These institutions would provide a central platform for coordinating carbon capture, transport and storage projects, thereby reducing the economic risks. A Dutch-German cluster approach could reduce costs by generating economies of scale.
• Build on the first infrastructure outlook by power and gas TSO’s TenneT and Gasunie and plan a cross-border and integrated energy infrastructure with power-to-gas as a cornerstone.
• Institutional: Create a regional cooperation platform for decarbonisation similar to that for the energy sector, i.e. the Pentalateral Energy Forum, or depart from an existing national institutions like Germany’s Working Group on Emissions Trading.

The Dutch-German summit is thus an important moment for reflecting on respective national policy efforts and on how the pooling of resources could boost Europe’s flagging climate ambitions.

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Dr. Jan Frederik Braun is Strategic Energy Analyst at The Hague Centre for Strategic Studies.

Dr. Michael Pahle is Head of the Working Group “Climate & Energy Policy” at the Potsdam-Institute for Climate Impact Research.

Dr. Mart van Bracht is Director of the System Integration Programme, Topsector Energy.

Footnotes

1.  In March 2019, Angela Merkel assembled top aides to form a climate cabinet with the aim of improving Germany’s climate protection record. Cabinet members include Finance Minister Olaf Scholz, Economy and Energy Minister Peter Altmaier and Environment Minister Svenja Schulze.
2. The question of how to get to a CO₂ price is ultimately secondary. Introducing a national price, such as in the Netherlands and Germany, should only be interim solutions towards integration in the ETS.
3. Together with Flanders and the German state of North Rhine Westphalia, the Netherlands is home to the world’s fourth largest chemical industry cluster. Almost 20% of the sector’s total turnover at European level is generated by this ‘trilateral cluster’.
4. The ´rebound´ effect refers to the fact that by decommissioning coal-fired power stations in Germany the electricity price increases, and in turn remaining coal and lignite power stations connected to the German market can increase production. The ´waterbed` effect functions via the ETS, as carbon leakage reduces the demand for certificates and hence the price of emission allowances.
5. An example of the interweaving of sectors is the use of industrial waste heat for buildings.