Plans are being made in Germany to extend carbon pricing to sectors that are not covered by the European emissions trading scheme, principally buildings and transport. But the policy debate is split over which instrument to use: should it be a carbon tax or an extra emissions trading scheme?
In an article published in the Frankfurter Allgemeine Zeitung (Germany’s leading newspaper) Frank Jotzo of ANU and Andreas Loeschel of University of Muenster propose a compromise that would meet the key objectives: start with a national carbon tax, and later integrate into the EU emissions trading scheme. This avoids the risk of a price shock at the start, and allows certainty over emissions outcomes later. This is the model that Australia used in its carbon pricing mechanism which was in place from 2012 to 2014.
Jotzo and Loeschel are co-directors of the Australian-German Energy Transition Hub.