Germany’s new national emissions trading scheme will start in January 2021. The scheme has its legal basis in the German Fuel Emissions Trading Act (Brennstoffemissionshandelsgesetz – BEHG) passed at the end of last year. The new Act supplements the European emissions trading scheme set out in the German Greenhouse Emissions Trading Act (Treibhausemissionshandelsgesetz – TEHG) and affects the transport and heating sectors in particular.

Key provisions of the BEHG

The BEHG concerns business entities that are potentially liable for energy tax as a result of putting carbonaceous fuels into circulation (particularly petroleum, diesel, liquid gas, natural gas, heating oil and coal).

By 31 July of each year, these entities must inform the Federal Environmental Agency (Umweltbundesamt) about their total fuel emissions over the previous calendar year. By 30 September, they must submit valid emission certificates for the previous calendar year that correspond to the total amount of fuel emissions reported. An emission certificate entitles the holder to put a volume of carbonaceous fuels into circulation that has the potential to emit one tonne of CO2.

An introductory phase is set for the period from 1 January 2021 to 31 December 2025, although the introductory phase for fuels listed under Schedule 1 of the Act (eg coal and some forms of municipal waste) begins in 2023.

During the introductory phase, emission certificates will be sold by the Federal Environmental Agency at a fixed price and without any quantitative restriction.

Serious doubts regarding the constitutionality of the BEHG

The BEHG raises serious constitutional concerns. Several legal opinions provided during the legislative process have expressed the view that the fixed price required to be paid to the Federal Environmental Agency for the purchase of emission certificates represents an unconstitutional fee. There are strong reasons supporting this view.

The rules governing Germany’s public revenue and finances, known as the ‘financial constitution’ (Finanzverfassung), is based on the principle that taxes are the primary means of financing general government expenditure. Non-tax levies are also permitted but their introduction must be justified on objective grounds in order to not undermine the protective and limiting function of the financial constitution.

According to the case law of the German Constitutional Court (Bundesverfassungsgericht – BVerfG), the legislator can impose non-tax levies on individuals that use limited natural resources and, hence, enjoy a special benefit. In such a case, however, the non-tax levy must act as a consideration for a special allowance to use that natural resource. Special allowance means that the beneficiary enjoys the right to use the resource in question, while others are not permitted to use this resource at all or to the same extent.

Consequently, the legislator is entitled to implement a cap-and-trade emissions system, which, among other things, means generating a limited number of allowances for CO2 emissions, selling them on the market and, thus, giving rise to a market price for CO2.

Under such conditions, the payment is a non-tax levy, since it is a consideration for a special allowance to pollute the air either directly or indirectly (ie via customers). The form of a non-tax levy is appropriate, as a tax is incapable of implementing a CO2 price based on a cap-and-trade mechanism.

The fixed-price payment required under the BEHG for purchasing fuel emission certificates from January 2021 also represents a non-tax levy, as it is a consideration for an allowance to put carbonaceous fuels into circulation. In contrast to a cap-and-trade system, however, the Federal Environmental Agency is entitled to sell an unlimited number of emission certificates at fixed prices during the introductory phase of the BEHG. Thus, the certificate payment has the nature of a non-tax levy, although it causes effects equivalent to an energy tax based on CO2 emission factors.

It is questionable whether the legislator was justified to implement a CO2 price mechanism by a non-tax levy, even though it had the opportunity to implement the exact same price mechanism by a tax. Consequently, it is also questionable whether the obligation to submit fuel emission certificates for the calendar years 2021 to 2025 is constitutional.

Affected businesses are now confronted with the following challenge: on the one hand, they need to assess whether recourse should be taken to the courts against the obligations imposed by the BEHG; on the other hand, they must assume that this new legislation is valid and prepare for the start of emissions trading in January 2021.

This is naturally easier for businesses that already have experience with European emissions trading. For others, such as gas-distribution companies, the implementation of the BEHG represents new legal and economic territory.