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The success of the energy transition is compromised by low carbon dioxide prices and subsidies for fossil fuels. They counteract all efforts made to achieve the defined goals. The reason for this can be found in fiscal policy: unless carbon emissions come at a meaningful cost, there are few rational and economic incentives to avoid causing these emissions. In fact, companies that do protect the environment are put at a disadvantage.

In the absence of meaningful carbon prices, there will be no fair competition nor will the energy transition be successful. The European emissions trading system will not be able to create sufficient incentives for investments in climate-friendly technologies in the foreseeable future. A carbon price has the potential to create a reliable and stable financial incentive for decarbonising our economy and our society.

Existing taxes on energy are the result of a long tradition. The existing taxes in the energy sector have grown historically but are not oriented towards the purpose of the energy transition. These taxes do not follow an overall systematic approach and, what is worse, the many exemptions they provide for individual industries and use cases have an effect on taxpayer’s behaviour that can go as far as creating false incentives to the detriment of the climate and against sector coupling. These taxes need reforming, in a way that establishes consistent carbon prices across the power, heat, and transport sectors. Tax rates ought to be designed to reflect the energy content and carbon intensity of technologies. The energy tax rate could still vary between different sectors so as to take account of specific financing needs and additional costs payable for harmful effects other than those on the climate, such as air pollution or transport infrastructure. Taxing the energy content can also create incentives for greater efficiency where zero-carbon energy sources are concerned. It is crucial that all forms of energy must become subject to a uniform tax on carbon: we recommend that the tax rate be initially fixed at €30 per tonne of carbon and then be incrementally raised to reflect the costs on the climate. Under this scheme, the competitiveness of the various energy sources would depend first and foremost on the effect they have on the climate. This would bring the tax system in line with objectives of the Paris Agreement.

Björn Klusmann is managing director of the Green Budget Germany think tank.

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What we need above all is a broader view of the architecture of climate protection and its instruments. I believe this involves the three following elements:

1. An offensive that promotes innovation and technology

This will provide incentives across all sectors to advance low-carbon technologies – for the energy sector as well as for industry, transportation and the entire building sector. My plea is for seed money and against permanent subsidies. The sooner innovative technologies become marketable and competitive, the better. Such an offensive could create prospects in all areas – and thus strengthen Germany as a hotbed instead of hollowing it out.

2. Reliable reduction paths for all sectors

Undisputedly, we intend to achieve the European reduction goals. Clear, realistic targets enable reliable planning and prevent structural upheaval in industries and regions. The electricity sector has the European Emissions Trading System. This comprehensive scheme works and encompasses a strategy, a reduction path and a tool. The key factor is the cap, which steadily lowers the level of allowable emissions. It is the cap that guarantees that the goals are achieved – not the price of carbon dioxide.

3. An umbrella strategy with a holistic view

We are en route to becoming ‘all-electric society’, with electricity being the main fuel. To achieve this, the use of electricity in further sectors must become competitive. Creating a tool to accomplish this is up to policymakers. One option could be to readjust the tax and levy system. The approach here could be to figure out how to maximise carbon reductions with as little capital as possible. This will bring movement into the tried-and-tested triangle of energy policy objectives consisting of security of supply, economic feasibility and environmental compatibility.

Conclusion: Placing all one’s chips on regulatory instruments such as a predetermined carbon price falls short of the mark. Instead, we should seize the technological innovative opportunities to help make the energy transition a success and gain acceptance.

Matthias Hartung is CEO of the German Lignite Industry Association (DEBRIV).