KfW/ZEW CO2 Barometer: German businesses inadequately prepared for reforms in EU emissions trading from 2013

German enterprises are inadequately prepared for the third trading period of the EU Emissions Trading System (EU ETS) starting in 2013.

This is the result of the KfW/ZEW CO2 Barometer which was published for the third time today. Up until today, too few German businesses have taken steps to reduce greenhouse gas emissions. Only 40% of the surveyed enterprises have so far assessed the expected costs.

“A key finding of the study is that many investments that would provide considerable emission reductions are not expected in the short term and even in the medium term. They will come too late for the energy turnaround”, said Dr Norbert Irsch, Chief Economist of KfW Bankengruppe. “This has to do with the long remaining lifetime of the plants covered by the Emissions Trading System, which is 15 years on average.” The share of businesses planning investments from 2013 is rising. Investments in energy efficiency technologies in particular are on the agenda. “What is encouraging is that carbon reduction is increasingly becoming the main motive of investments and no longer represents only a welcome side-effect”, said Prof Dr Andreas Löschel (ZEW), Head of the Environmental and Resource Economics, Environmental Management department at the Mannheim-based Centre for European Economic Research (ZEW).

What is driving the increased interest of businesses in reducing carbon emissions is the fact that a significant drop in the free allocation of emission allowances from 2013 will create considerable additional costs for them. At present, only 27% of enterprises have to purchase additional emissions allocations. From 2013 this share will rise to 63%, according to the current CO2 Barometer. The resulting additional costs differ greatly between the individual enterprises participating in emissions trading. For enterprises with high carbon emissions the costs will be in the millions. As the actual allocation quantity will not be determined until sometime in the second half of 2012, the surveyed enterprises do not have enough time to prepare. They estimate that it would take them more than 20 months to prepare optimally.

The results of this year's KfW/ZEW CO2 Barometer illustrate that enterprises have to adjust even better to the challenges of the EU-ETS. Particularly with a view to efficient carbon management, they have a lot of catching up to do. The majority of the enterprises affected by emissions trading (70%), for example, offer their employees no incentives for identifying carbon reduction potential.

In the opinion of the authors Irsch and Löschel, emissions trading fails to have a full incentive effect in the majority of the enterprises.

Another key result of the study is that 61% of enterprises with several plants offset a surplus or shortfall in emission allowances for specific plants within the company itself. The emission allowances therefore do not enter the free trade, which impairs the efficiency of the emissions trading instrument. The efficiency of emissions trading can also be impaired when trading activities are hampered by transaction costs. Thus, according to the KfW/ZEW CO2 Barometer, an enterprise with low emissions must calculate a surcharge of roughly 4% on the certificate price, particularly for the emission measurement and the necessary reporting, while an enterprise with high carbon emissions on average must calculate only 0.5%.

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