German Green Party's Heinrich Boll Foundation Offers Guidance on Cap and Trade, Feed-In Tariffs

What can the United States learn from what Germany and Europe are doing in the area of climate change? What is the most distinct difference between American policy and European policy?

There are a lot of possibilities to learn from each other because the political systems are similar, and you can actually transfer good experiences from one system to the other. Our main goal is to try to foster that process.

Europeans are some years ahead of the United States in introducing a cap-and-trade system and promoting renewable energy in the electricity and heating markets. The U.S. can take a look across the Atlantic to avoid making the same mistakes that Germans and Europeans have made.

What can the United States and California learn from what Germany and Europe are doing with the cap-and-trade system specifically?

First, it takes time to install the system. There's a lot of resistance in industry to cap and trade because it is a new approach. In Europe, the pilot phase lasted for two years. In the negotiations for this pilot phase, lobbyists came in and wanted an extra rule here and there and so on.

To get the system started, you have to make political compromises to get acceptance with the industry, with NGOs, and so on. Most of these compromises weaken the design of the system. Essentially, you have to build a strong architecture for a cap-and-trade system, and for this, the Europeans needed two years. After that, they figured out how to correct the weaknesses of the system. They are now in the first real period, and it seems to work quite well.

What were the protocol negotiations that went on about how to measure and account for a unit? What did you learn from your demonstration project in Germany, and what have the British learned from their experience?

It took the European governments a long time to actually register and get all the data right from the companies. There has been a European-wide approach by the E.U. Commission that defined standards of how to measure and monitor emissions. At some point in the pilot phase, it became clear, however, that too many allowances had been distributed to the industries. After realizing this, the market abruptly broke down and the price of CO2 allowances went to almost zero, because there was obviously no demand. This situation was due to lack of the right data in the beginning. This problem has been eliminated in the second phase. We now have robust data in the E.U. But the lesson for the U. S. is that it takes time to build up robust data.

Are the units and measurements really transparent in the European market? Is there abuse of the system?

In the first period, it seemed that some of the big industry players tried to use the market: they bought allowances at certain points where they had an interest in raising the allowance prices because they could then add onto the electricity charge for consumers. There is indication that they did this on purpose so they could earn more revenues from selling electricity.

The second period started in 2008, so we only have four months of experience with it. We have to see how liquid the market is and who is actually buying and selling. But in general, I would say it is very transparent. You have two or three places for trading in Europe, for example, the London Stock Exchange and the EEX in Leipzig.

One important difference to the first period is that countries stop grandfathering-giving allowances out for free. One example is Germany, which in 2008 started to sell 8 percent of overall allowances to power companies. They take the 8 percent that usually would have been distributed to power companies for free and sell it on the market to anyone who wants to buy it. The experience is that the CO2 is being bought immediately once it is on the floor.

That tells us that the market is scarce today; the system is working because all the allowances that are being put out there are being sold. Second, we have a very stable price. Last year, Germany calculated revenue of €10 per ton of CO2. They planned to sell 40 million allowances in 2008, raising revenue of €400 million and spending two-thirds of this revenue domestically on climate protection and energy conservation and one-third on international projects in southern countries.

They sold these allowances in the first half of 2008 for prices around €22-24 per ton and are making much more money than they had thought they would. That's a very encouraging sign, which tells us the market is robust with a scarcity of CO2 allowances that we did not have in the last two years.

Why is the Green Party in support of cap and trade? What are you hoping will result?

Cap and trade is the key instrument to reducing climate emissions in the industry sector. It doesn't work as well in other sectors, like the transport sector. It doesn't make a lot of sense to include transportation, because the price elasticity is much higher there, and it won't have an ecological impact on car drivers if you include them in cap and trade. But it's a keystone for climate protection in industry. It combines ecological integrity with economic effectiveness. It's the best economic way to do climate protection in industry.

The much-editorialized alternative is a carbon tax. Why did Germany move to cap and trade instead of a carbon tax?

It's a purely American debate to choose between a carbon tax and a cap-and-trade system. Many European countries introduced carbon or energy taxes in the ‘90s; it was called ecological tax reform, meaning you introduced higher energy taxes, and with that revenue you reduce labor taxes or income taxes. It's a tax-shift program that turned out to be very successful.

Politically however, it was very hard to do, because there was a lot of anger in the population when gasoline taxes were raised. It was taken for granted that income taxes were lowered, but nobody wanted to pay higher gas taxes. The Green Party in Germany fought very hard to implement the eco-tax, and it worked quite well, but didn't really get credit for it.

On the European level, a carbon tax turned out to be not realistic because to introduce a Europeanwide tax measure, all E.U. member states-back in the ‘90's 15, today 27-have to agree unanimously.

But taking the European experience of having both energy taxes and a cap and trade program: It would be a mistake to choose one or the other. They both have their purpose and they both aim at different solutions in climate change.

If you were to offer testimony before a U.S. Senate committee or the California Legislature regarding cap-and-trade policy, what would the key points of your testimony include?

I would offer three points. Keep it as simple as you can. Start with high auctioning in the power sector. And don't worry if it's not working perfectly from the beginning; it takes two years to get the system running.

One of the unique features of the German energy and renewable initiatives is a feed-in tariff. Why and how was this regulatory regime adopted, and how is it working to encourage investment in and use of renewables?

The history of this goes back to 1991, when the Stromeinspeisegesetz (a German name for a feed-in tariff law) was passed to promote wind energy on a small scale. It was well designed, but the incentive was too low to push technology development.

In 1998, we had a new government formed by the Green Party and the Social Democrat party, which advanced the feed-in tariff. It expanded the rates to all kinds of renewable energies and adjusted the rates in a way to stimulate growth in the sector. The bill was passed in 1999, and from that time on, there has been a boom in the renewable sector in Germany. There has been job growth in the sector, and the German companies that are producing photovoltaics or windmills are delivering big shares in the world market. Overall, Germany has had very good experiences with this law with regard to ecological and economic benefits.

What were the law's incentives that encouraged investment in and conversion to renewables?

The key of it is twofold. First, the law guarantees you access to the grid, so once you build a windmill in your backyard, the grid operator has to give you access to the grid. The second is that you are guaranteed to get a fixed price for 20 years once you get it onto the grid. This leads to certainty for the investor that he or she can calculate how much the return of the investment will be. That's a keystone to the success of the law, because that makes private capital really go into this area and banks easily give loans for these kinds of investments.

Are the large utilities the chief opponents to a feed-in tariff?

Renewables are gaining one percentage point of the German energy market each year. We started in 1998 with 5 percent renewables share in electricity, and in 2007 we were at 14 percent. That's enormous growth, and that growth did not happen with the conventional utilities. The German energy market is basically divided by four big utilities that dominate the market. They are not interested in that technology because it's too small-scale for them. But the law attracted a lot of private investment in the sector, and now there is much more competition in the market. All this renewable growth is happening on a smaller scale with smaller businesses and smaller investors, which is bringing competition to the market and democratizing it, breaking up this monopoly that we have in Germany. It's a very good development.

What are the responses you get in the United States when you raise the subject of Germany's experience with the feed-in tariff?

It's very well known over here. I'm surprised that you hear everywhere about Germany being a frontrunner. German bills get watered down during the political processes just like in other countries. There are compromises everywhere. Not everything the Germans do on renewable energies and climate protection is as good as it could be; we're far from perfect.

But overall, the Americans are aware of the green development in Europe and that the Europeans have gained economic success with this development. The people I meet in the United States are very open for exchange and are very open to learn. I have to give Americans a lot of credit because they are open to new ideas, and if they like the idea, they just do it.

What renewable and energy efficiency incentives are offered to new and existing German homeowners?

We have a general efficiency mandate for new houses, which is quite ambitious, but there is not as much new construction going on today in Germany as there is now in the United States. We do not have a growing population. It's the already-existing houses that are the challenge. The parliament has recently passed a bill to introduce a mandatory requirement to install renewable heating systems in all new houses. This mandatory requirement would say that at least 30 percent of the heating system must be renewable. Additionally, some national funding programs have been put out there to modernize heating systems in existing buildings.