Rising CO2 Prices: Implications for Heating, Fuel, and Housing

The ongoing rise in carbon dioxide (CO2) prices in Germany is set to have significant financial implications for citizens, particularly in the areas of heating and fuel. Friedrich Merz, the leader of the Christian Democratic Union (CDU), has announced that these increases will result in higher costs for all households. The proposed approach by the forthcoming coalition government aims to utilize the CO2 price as a primary regulatory mechanism to meet climate targets.

The strategy focuses on incentivizing transitions to carbon-neutral technologies through a gradually increasing CO2 price, moving away from strict regulations and bureaucratic measures such as the controversial heating law. Currently, the CO2 price in Germany stands at EUR55 per tonne, applicable to fuels like gasoline, heating oil, and natural gas. This figure is expected to rise to EUR65 by 2026, representing an increase of over 18%. As a result, citizens can anticipate higher expenses related to heating and fuel consumption.

To mitigate the financial burden on lower-income households, Merz had previously proposed a climate allowance during his election campaign, suggesting a compensation of EUR200 for affected families. However, this proposal did not make it into the coalition agreement. Instead, the government plans to implement a reduction in electricity taxes and network fees funded by the additional revenue from CO2 pricing, potentially offering relief of up to EUR200 annually.

The coalition also intends to continue promoting the transition to more environmentally friendly heating solutions. Andreas Jung, the CDU's deputy leader, emphasized that incentives for climate-friendly heating systems would remain in place, supporting various technologies including heat pumps, connections to district heating networks, and wood heating systems without preference for any specific solution.

Looking ahead, there are questions about the future trajectory of the CO2 price. After the planned increase in 2026, it is anticipated that the national CO2 price will be integrated into a European emissions trading system (ETS 2) by 2027. Under this system, the CO2 price will be uniformly established across EU member states. However, exceptions may apply, allowing individual countries to acquire additional CO2 certificates from the European Commission.

There is potential for the price to initially be set below the current German level, especially given that several Eastern European nations, such as Poland, are still heavily reliant on coal for energy. These countries are advocating for a lower starting price in the emissions trading system. Analysts from ClearBlue Markets predict that the European CO2 price might stabilize at EUR55 per tonne in 2027, with expectations of a gradual increase to EUR105 per tonne by 2030.