After weeks of wrangling, the German Federal Parliament’s Budget Committee approved the budget for 2024 on Thursday evening, thereby complying with the debt brake for the first time since 2019. Total expenditure is planned at around 476.8 billion euros. The parliament is expected to finally approve the budget on 2 February. As is well-known, the federal budget should have been in the bag long ago, but a landmark judgement by the Federal Constitutional Court thwarted the governing coalition’s plans last November. As a result, billions had to be plugged in the budget and in the climate and transformation fund. In some cases, painful cuts and savings as well as a reduction in subsidies were unavoidable. In addition, the reduction in the national carbon price from 45 to 40 euros was cancelled.
The biggest challenge for the coalition parliamentary groups was to draw up a balanced budget that prioritised social justice, economic incentives, investment in climate protection as well as strengthening democracy and international cohesion, despite very different perspectives, against the backdrop of multiple crises and despite a difficult starting situation following the Federal Constitutional Court ruling.
It is in the nature of things that this cannot be achieved to everyone’s satisfaction. Even if German farmers seem to be the most vocal in their protest against the gradual dismantling of the agricultural diesel privilege, one omission should be emphasised much more clearly: the continued failure to implement the ‘climate money’ that had been agreed in the coalition treaty. On Wednesday, Federal Economics Minister Robert Habeck called the idea behind the ‘climate money’ “captivating”: the state returns a significant proportion of the revenue from the national and European CO2 levy to all citizens of the country in the form of direct payments. If everyone receives the same amount, the expected price increases for electricity and heat will be compensated to some extent, especially for those who consume less. Although they are less affected by energy price increases in absolute terms, rising petrol prices and more expensive heating are all the more of a burden in relation to their income. On the other hand, those who consume a lot in terms of consumption, travelling, heating and private electricity will be disproportionately less relieved by the ‘climate money’. This creates an incentive to save energy. At the same time, the wealthy finance the ‘climate money’ of others and the energy transition for all.
This makes it all the more tragic that the establishment of a payment mechanism, which requires 82 million potential holders of a tax identification number to be linked to an account number, has not yet been prioritised. However, movement has apparently taken place in the past week to help climate protection gain more acceptance among voters in time for the next general election. In Berlin, government spokesperson Steffen Hebestreit referred to statements made by Finance Minister Christian Lindner, according to which the technical requirements for a per capita payment would probably be in place by the end of the year. “Then you have to decide in the budget where this money should come from”.
Meanwhile, the carbon market analysts can forget about looking at the weather forecasts. When cold weather fronts appear on the horizon, the price of EUA shows virtually no sign of them. One of the reasons for this is the EU Commission’s fatal decision to auction off 20 billion euros worth of pollution allowances prematurely to finance the RePowerEU programme – so-called “frontloading”. However, the intention behind this measure was obviously not only to generate additional revenue in the ETS, but also to correct prices, which would reduce energy costs for the industry. Overloaded with EUAs, however, the market is as sluggish as a container ship lying deep in the water.
We already warned here in December 2022 that it is not the task of emissions trading to relieve industry of energy costs. Rather, the ETS functions as a cap-and-trade system, i.e. it is based on reducing the quantity of certificates. And one of the aims of the “Fit for 55” programme is to further sharpen this system in order to still achieve the CO2 reduction targets and thus the 1.5 degree target. A flood of EUAs would counteract this and also make a mockery of the market stability reserve. In any case, it is absurd to abandon the targets of the ETS, even temporarily, in order to finance the same targets as part of the RePowerEU programme. On the contrary, cheap EUAs also make coal and gas cheaper and would slow down efforts to phase out these energy sources. Therefore, if the ETS is to contribute to financing the RePowerEU programme, then only in line with the common objectives, i.e. through higher prices and thus higher revenues in the ETS.
After a slightly bullish start, emission allowances came under even greater pressure from the second half of the past trading week. The Dec 24 contract fell further and closed at EUR 63.65, the same level as in September 2022. This could prompt hedge funds to liquidate short positions in order to drive the price upwards, although this is not yet a foregone conclusion. Should the current price level fall further instead, a correction by the EU Commission would be highly desirable in both senses of the word.
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