The Flexcap – An Innovative CO2 Pricing Method for Germany

According to the federal government, this switch between instruments is intended to guarantee companies and consumers price security initially, while at the same time ensuring compliance with the climate targets in 2030.4 In this article we present the "Flexcap," a mechanism that combines the advantages of a tax and an emissions trading system in a single system. A part of the greenhouse gas emissions (GHG) in Germany is already regulated by an emissions trading system: the European Emissions Trading System (EU ETS).5 The EU ETS covers around 45 percent of total emissions across the EU; in Germany, the energy, industry, and construction sectors covered by the EU ETS accounted for as much as 57 percent of total emissions in 2017 (SVR 2019). In emissions trading, the supply of certificates is fixed. [...]supply and demand can clear only through a price adjustment (see Figure 2). [...]it limits planning secu- rity for companies and consumers (BMWi 2019) and renders additional measures ineffective.