Why removing the German renewables levy will help the climate

4 March 2021, by Dr. Johannes Jarke-Neuert

Photo: Unsplash/ Diz Play

Currently, around one fifth of the gross electricity price paid by German consumers is due to the so-called EEG levy (EEG stands for Erneuerbare Energien Gesetz, Renewable Energies Act), which is used to subsidize green electricity plants. With a total of around €30 billion per year.

The German Federal Ministry for Economic Affairs and Energy led by Minister Peter Altmaier intends to scrap the levy and fund the subsidy entirely from the public budget (including revenues from national emissions trading).

This would not only be an improvement in terms of burden-sharing fairness, as the levy has a proportionally greater impact on smaller incomes than on larger ones. But doing away with it would also help the climate. 

How can that be, if climate action is the purpose of the EEG levy in the first place? 

The essence of this apparent paradox is that the levy is applied to electricity consumption - and only to electricity consumption. It thus makes electricity more expensive relative to other forms of energy. The removal of the levy will therefore have two effects.

The first is that goods and services made with electricity will become cheaper in real terms and will therefore be demanded in greater quantities. In one place or another, they will replace climate-harming alternatives. For example, if the price of train tickets goes down, some car rides or plane flights will be substituted. The trick is that the additional electricity consumed does not cause any additional carbon emissions, because it comes either from renewables or from power plants that are subject to the EU Emissions Trading System (EU ETS). And there, emissions are capped.

The second effect is that the adoption of production technologies that run on electricity instead of fossil fuels becomes more attractive. For example, waiving the EEG levy will lower the operating costs of an electric vehicle relative to an equivalent combustion engine car. In fact, directly and indirectly (via heat generated from or energy carriers synthesized with electricity, such as hydrogen) electrically powered technologies are at the heart of the move toward climate neutrality, because renewable energies are generally made usable specifically in the form of electricity. They are therefore the crucial link between the deployment of renewables and actual climate action - experts refer to this as "sector coupling". The EEG levy is like grit in the works at this point, because it makes electrically powered technologies unnecessarily expensive in real terms and thus hinders the transition.

Wrapping up: If the EEG levy is replaced by fiscal means, the intended support for renewables remains intact, while at the same time additional incentives for carbon abatement are created. From a climate action perspective, there really is no catch. The EEG levy is a birth defect that not only imposes a socially unbalanced burden but has also been slowing down a fully thought-out energy transition for years. It is about time that it is dropped.