Tradable performance standards for a greener transportation sector: an economists’ appraisal of the German greenhouse gas mitigation quota

Abstract

Background

The greenhouse gas (GHG) mitigation quota is a unique instrument in Europe that redistributes money from high emission to low emission fuel markets while forcing fuel distributors to reduce the average emissions of their fuels. This paper presents the design of the German 2022 GHG quota, places it in the context of environmental policy instruments, and examines its impact on the affected fuel markets in relation to other environmental policy instruments. We aim to provide insights that can be applied in industry and policymaking, and to provide a basis for further research, to highlight GHG quota trading as an alternative to allowance trading and carbon taxes. Field research was conducted in the form of expert interviews. Furthermore, intermediaries and brokers were contacted via email and asked for transaction data. In addition, a qualitative literature review was conducted and publications of responsible authorities as well as relevant legal texts were used to gather information.

Results

We find that the GHG quota trading overlaps with the structures behind emission standards and emission trading schemes and, therefore, falls under the category of tradable performance standards. However, it also contains aspects of a subsidy and interacts directly or indirectly with several different markets.

Conclusions

While the GHG quota trading system shows potential as an environmental policy tool, its effectiveness is hindered by market complexities and external disruptions. Addressing these challenges through targeted research and policy adjustments could enhance its impact and alignment with broader climate goals.

Background

The transportation sector contributed a quarter of the global energy-related GHG emissions in 2019¹ [1, 2], while in Germany it contributed a fifth of the country's GHG emissions [3]. Better engine and emission abatement technology and blended fuels (such as E10) are contributing to mitigations in emissions. However, these measures are more than offset by increasing traffic volume and the growing number and share of more powerful vehicles with comparatively high fuel consumption in private road transport. Governmental intervention is needed to reduce emissions to a socially, economically, and environmentally desirable level.

The "Fit for 55 Package" is the EU Commission's proposal to adapt existing legislation to the new, more ambitious climate policy targets and is also part of the “Green Deal” [4]. As a result, various regulations have been enacted for the transportation sector to mitigate GHG emissions [Effort Sharing Decision 406/2009/EG, Effort Sharing Regulation (EU) 2018/842, Renewable Energy Directive (EU) 2018/2001 (RED II)]. To protect the climate, the German government passed the Federal Climate Protection Act in 2019, which stipulates that GHG emissions from the transportation sector must be reduced to 95 Mt CO_2eq by 2030. GHG neutrality has to be reached by 2045 [5]. An amendment to the law in 2021 tightened the target again, so that now only 82 Mt CO_2eq are permitted in 2030 [6].

Germany's climate protection policy uses various instruments to achieve the set targets. In addition to the EU Emission Trading System (ETS), these include the National Emission Trading Scheme for the transport and building sectors, subsidy measures, and the GHG mitigation quota, which is an extension of the former biofuel quota, which regulated a minimum share of biofuels in total fuel sales in Germany [7].

The GHG mitigation quota legally obligates distributors of fossil fuels to reduce the average GHG emissions of the fuels they place on the market by a certain percentage. To meet this obligation, distributors must sell low emission fuels in addition to fossil fuels with high emissions, hereafter referred to simply as fossil fuels. However, the legislation also allows other parties to be paid for replacing fossil fuels with low emission fuels. This scheme has become known as GHG quota trading, not to be mixed up with ordinary GHG emission trading schemes with a cap such as the EU ETS. Since 2022, owners of electric vehicles can be paid for replacing fossil fuels with electricity. This is the first time that private individuals have participated in GHG quota trading. Together with a significantly increased GHG quota level by 2030, it has recently led to a renewed interest in the German GHG quota trading. In addition, other countries besides Germany, such as Austria and Sweden, are implementing or have implemented instruments that are similar to the German GHG quota trading. Furthermore, the European Commission plans to introduce a standard that is similar to the GHG quota into the regulatory framework with RED III [8].

This paper aims to shed some light on the 2022 GHG quota trading system by providing a detailed overview of how the German 2022 GHG quota trading is structured and what kind of environmental policy instrument it is. In relation to other environmental policy instruments, its impact on the affected fuel markets is investigated and market data is provided.

Introduction

Our brief literature review reveals that there is still little published data on the German GHG quota trading, and that related literature is still scarce. Available studies typically focus on the quota level and the low emission fuel mix. Fehrenbach and Jöhrens [9] examine how the GHG mitigation quota could be developed into an ambitious instrument for climate protection in the transport sector. They postulate that it would be necessary to gradually increase the quota level in line with current climate protection goals to include all potentially relevant low emission fuels, and to calculate the specific emissions of fuels over their entire life cycle. They also call for tradability of GHG mitigation certificates to ensure market transparency and liquidity. In the SOBIO project, researchers concluded, based on their optimization model, that electrification of road and rail transport is the most competitive option for meeting the GHG mitigation quota, followed by biofuels and electricity-based fuels [10]. Meisel et al. [11] evaluate the possible effects of the European and national climate protection goals on the German GHG quota. They answer the question of what the GHG quota level should be to achieve a 14% renewable energies share in the road transport sector and how high the quota level would have to be to meet the national climate protection targets. Naumann et al. [12] predict the possible consequences of the GHG quota and detail how these impacts fit into Germany’s climate protection goals. Their study suggests that the quota level is too low for meeting the national climate protection targets. They further recommend the integration of the GHG mitigation quota into a cross-sectoral strategy with proper monitoring [12]. As the literature on this topic is still scarce, our study is the first to systematically and thoroughly examine the GHG quota as an environmental economic instrument and thus provides a basis for further research. Such research is necessary and useful, because the quota is the only environmental policy instrument in its form that directly redistributes money from the market for high-emission fuels to the market for low emission fuels, and it is becoming increasingly relevant as quota levels rise and the option of extending quota trading to other sectors is considered.

The GHG quota trading is a hybrid instrument that has characteristics of both regulatory and market-oriented instruments. On the one hand, GHG quota trading resembles regulatory instruments, particularly command-and-control instruments. The similarity lies in the fact that legislation sets a specific requirement—the GHG quota—which each firm must meet. The GHG quota trading overlaps with both technology mandates and performance standards within the subcategories of command-and-control instruments. The legislation restricts the applicable technologies, in some cases through a sub-quota. Such restrictions are the common feature of the GHG quota trading and technology mandates. However, various compliance options are allowed, and the GHG quota sets an emission limit comparable to a performance standard. On the other hand, the GHG quota trading has characteristics of market-oriented instruments, as trading in compliance option certificates is legally permitted. In this respect, trading is similar to trading in allowance certificates, but the number of environmental allowances is not fixed. The GHG quota trading resembles the internalization strategy referred to as tradable performance standards, which combines regulatory and market-oriented instruments [13, 14]. Just like a tax, the trading of GHG quotas increases the price of fossil fuels. Although it is a quantity instrument, it also contains a price component, as no fixed quantities are specified. Since the price of fossil fuels affects sales and thus the required quotas, no specific caps are set.

Unlike trading in Green Certificates and Guarantees of Origin, which are based on the origin of the energy [15], trading in GHG quotas is based on exceeding a regulatory threshold or standard. Entities performing better than the regulatory threshold generate tradable credits, while those underperforming must purchase credits to comply. GHG quota trading focuses on performance relative to a pre-determined standard, regardless of the energy source or technology used. Tradable performance standards also mandate a standard that cannot be achieved with conventional technology [16] or that imposes higher costs [17]. Products with a performance above this standard earn credits they can sell; products with a performance below the standard must acquire those credits to comply with the standard [18].

Tradable performance standards have been widely used in the U.S. electricity and transportation sectors [14]. Exemplary are the Renewable Portfolio Standards (RPS) implemented in 29 states to improve the U.S. electricity market’s environmental friendliness. These standards require utilities to provide a minimum amount of electricity from certain renewable energy sources [19, 20]. Another example of tradable performance standards are white certificates, also referred to as Energy Savings Certificates or Energy Efficiency Credits, which certify energy savings that can either be used to meet one's own legally mandated energy savings targets or sold to other obligated market participants. Such certificates are, for example, traded in Italy and Poland [21]. Similar policies in the U.S. transportation sector include GHG rates for cars and trucks, zero-emission vehicle programs, the National Renewable Fuel Standard, California's and British Columbia’s Low Carbon Fuel Standards (LCFS), and Oregon's Clean Fuels Program (CFP) [14].

The world's largest carbon emissions trading system, launched in China in 2021, is also a performance-based, standards-based form of emissions trading [14, 20]. A maximum amount of GHGs is allowed per MWh. Each MWh that a power plant produces receives the number of allowances equal to the limit free of charge. Power plants that emit less GHGs can sell some of their allowances, whereas those that emit more GHGs must buy additional allowances [22].

To the best of our knowledge, there is no comparable literature on German GHG mitigation that analyses its market mechanisms and provides some market data. Despite the high degree of similarity with other internalization strategies already implemented, the GHG quota trading scheme has some specific features that make it difficult to compare its efficiency with different internalization strategies. First, and in contrast to the U.S. National Renewable Fuel Standard or the former German biofuel quota, the GHG quota at its core is not a quota that prescribes the proportional use of a certain energy or technology (although the law does provide for minimum sub-quotas, such as for the use of advanced biofuels), but, as the name suggests, the mitigation of GHGs. Thus, in relation to other instruments that might prescribe or subsidize a certain technology the GHG quota aims for technological neutrality. However, this neutrality is limited by the lump-sum determination of the specific GHG emissions, multiple crediting of certain compliance options, and the quantitative restriction or requirement for certain compliance options.

Second, in contrast to quota-based tradable green certificate schemes, the quota does not address the entire fuel market, but only the distributors of fossil diesel fuel and gasoline. Nevertheless, the entire fuel market is affected. Related to this is that fuel is not a homogeneous product like electricity. The fuel market is heterogeneous, because different fuel types cannot be substituted at will. As a result, the GHG quota trading directly impacts two markets that influence each other, and it interacts with the markets for all compliance options.

Finally, it should be emphasized that the quota cannot only be met by obligated parties selling low emission fuels themselves and other quota-obligated parties selling them. Instead, non-quota-obligated parties can also sell certificates to the quota-obligated parties, which certify the sale of their energy quantity with corresponding GHG emissions. In this way, compliance is partially achieved outside the quota-obligated firms, and GHG emission mitigation is traded in a broader market to which both quota-obligated firms and many other actors have access. As a result, the costs incurred by the GHG quota trading scheme are not redistributed exclusively among quota-obligated parties, or incurred through government levies, as is the case with the classic tax and certificate trading solutions. Some of the costs are caused by the trading of certificates, through which payments are made to distributors of low emission fuels, resulting in cost reductions for them, which are passed on to end users through the relevant fuel market, thereby increasing the demand for lower-emission fuels.

The GHG quota applies to gasoline and diesel fuels (Sect. 37a, para. 4a, cl. 1, BImSchG, [23]). According to Sect. 37a, para. 3, of the BImSchG, the GHG quota must be calculated according to Eq. 1 (see below). The reference value ref contained in the equation expresses the amount of GHG that would have been emitted if the total amount of fuel put into circulation by the firm subject to the quota had all been fossil (Eq. 2). For this purpose, the total amount of energy from gasoline Q_g, diesel fuel Q_d and low emission fuels Q_i sold is multiplied by the average GHG emissions from the fossil fuel mix of 94.1 kg CO_2eq/GJ. This value is obtained by multiplying the fuel-specific GHG emissions of gasoline $\beta$ _g (93.3 kg CO_2eq/GJ) and diesel $\beta$ _d (95.1 kg CO_2eq/GJ) by the respective shares of the two fossil fuels in the total amount of energy from fossil fuels in Germany (Sect. 3, 38th BImSchV, [24]). Figure 1 illustrates this mathematical relationship:

Fig. 1

Illustration of the GHG quota calculation

$${quota}=\frac{{ref}-{{\beta }_{d}Q}_{d}-{{\beta }_{g}Q}_{g}-\sum {Q}_{i}{\beta }_{i}}{\text{ref}}$$

(1)

$${ref}=\left({Q}_{d}+{Q}_{g}+\sum {Q}_{i}\right)94.1 \, \frac{\mathrm{kg \, CO_{2eq}}}{\mathrm{GJ}}$$

(2)

Several, partly in their creditability limited low emission fuels exist to meet the GHG quota (Sect. 37a, para. 5, BImSchG, [23]). Applicable compliance options are biofuels (fatty acid methyl ester, vegetable oil fuel, hydrogenated or hydrotreated vegetable oils), biogas, synthetic methane, liquefied petroleum gas, hydrogen, electric energy used in electric road vehicles and Upstream Emission Reductions (UER).² Low emission fossil fuels, such as compressed and liquefied natural gas (LNG) and liquefied petroleum gas (LPG), were also eligible as a compliance option until 2021. Biogenic fuels from food and feed crops, used cooking oils, animal fats and palm oil are limited by sub-quotas (quotas within the GHG quota).

The GHG quota trading affects, and is affected by different markets. These are shown in Fig. 2.

Fig. 2

Markets affected by the GHG quota and the markets affecting the GHG quota

Quota trading allows obligated parties to fulfill their obligations by buying compliance option certificates from other parties. These certificates represent the placement of low emission fuels on the market on behalf of the obligated party, allowing them to credit the corresponding amount of energy against their quota (Sect. 37a, para. 7, BImSchG, [23]). The trading can occur between two obligated firms or between an obligated party and a non-obligated party (Sect. 37a, para. 6 and 7, BImSchG, [23]).

Figure 3 illustrates the quota trading mechanism.³ Q describes the energy content of the fuels, ß the average specific emissions. Labels referring to fossil fuels with high emissions are indexed h, labels referring to fuels with low emissions are indexed l.

Fig. 3

Illustration of the GHG quota trading

The GHG quota trading results from the quota q setting a target (${\beta }_{h}(1-q))$ for average GHG emissions (see dotted square in Fig. 3). Fossil fuels (the main products of quota-obligated parties) cause emissions above this target, while low emission fuels cause specific emissions below this target. Accordingly, lower emissions than allowed must be emitted elsewhere for each excess amount of emissions caused by fossil fuels to meet the average specific emissions target. If a firm's fossil fuel products cause excess emissions, it must purchase or generate a certain amount of GHG mitigation to meet its quota. GHG mitigation in this context is the mitigation of GHG emissions caused by the use of low emission fuels.

Energy that has not yet contributed to the previous year's quota can be carried over to the following year (Sect. 37a, para. 6, cl. 6 and para. 8, BImSchG, 2022). For electricity from renewable energy sources and the German electricity mix, the German Federal Environment Agency (UBA) provides specific GHG emission levels in kWh/kg CO_2eq as of the end of October of the previous year, which then apply for one year (Sect. 5, para. 3, 4 and 20, 38th BImSchV, [24]). The German Biofuel Quota Office of the Customs (Biokraftstoffquotenstelle) is responsible for the nationwide monitoring of the GHG quota.

Electricity used directly or indirectly in road transportation represents a special compliance option. Since low emission fossil fuels could only be used to meet the quota until 2021 (Sect. 11, 38th BImSchV, [24]) and conventional biogenic fuels are limited in quantity (Sect. 13, 38th BImSchV [24],⁴ electricity has become increasingly important for meeting the quota. A distinction must be made between electricity used to produce compressed synthetic methane or hydrogen and charging electricity used to power battery electric vehicles. The energy quantities of hydrogen and P2X fuels can be included in the GHG quota equation (Eq. (1)) with a factor of two (Sect. 14, para. 5, no. 1, 38th BImSchV, [24]). The energy quantity of charging electricity can be included in the equation with a factor of three (Sect. 5, para. 2, no. 1, 38th BImSchV, [24]).

Since 2022, persons who can claim the corresponding amount of charging electricity and market it via quota trading are charging point operators or a representative on their behalf (Sect. 5, 38th BImSchV, [24]). This means that end consumers can participate in trading for the first time and benefit directly from this. On the one hand, the electricity can come from publicly accessible charging stations, provided access to the charging station is possible for anyone at any time. On the other hand, the electricity used in electric vehicles may come from charging stations that are not accessible to the public. In this case, UBA certifies an average amount of electricity of 2000 kWh/year for each BEV after submission of the vehicle registration documents.⁵

Methods

The information collected for the present study was mainly qualitative, as little has been published on GHG quota trading so far [27]. However, market data and emission series were also collected. Due to the exploratory nature of the work, no specific information needs could be identified. Accordingly, the data analysis was inductive.

Field research was conducted in the form of six expert interviews. These experts were all pooling firm members who responded to an e-mail request to 70 pooling firms in Germany. Service providers work as intermediaries between third parties distributing low emission fuels and quota obligated companies. In line with Fabianek and Madlener [28] the interviews were semi-structured, as this allows unknown topics to be identified and discussed, because not all questions are predetermined as is the case with structured interviews. The structure of the interviews and a summary of the responses can be found in the Appendix (Table 1). The interviews were not transcribed as they are not at the core of our study. Furthermore, it has been shown that when research questions are relatively simple, this can substantially reduce the time required for data collection and analysis while still providing detailed and relevant information [29]. Instead, the interviews were either recorded or protocolled and ex post verified by the interviewees. To collect market transaction data, 56 intermediaries were identified [December 2022] using the comparison portals autobild.de and verivox.de, and a Google search using the keywords “THG” (GHG), “THG Quote” (GHG quota), “Treibhausgasminderungsquote” (greenhouse gas mitigation quota), “THG Poolingunternehmen” (GHG pooling firm) and “THG Zwischenhändler” (GHG Intermediary). The identified intermediaries were then contacted via email and asked for transaction data. The level of detail in the request was not specified in order to obtain as many responses as possible. A total of eight firms provided data. In addition, eight brokers were contacted, of which only one provided data. The intermediaries' data was used to validate the broker’s data. A qualitative literature review was carried out in addition to the field research using the keywords “THG”, “THG Quote”, “Treibhausgasminderungsquote” in both German and English in the common literature databases (e.g., Google Scholar, Science Direct, SpringerLink, …). Literature on related instruments (ETS, carbon tax, tradable performance standards) was also reviewed. Information was gathered from the websites and publications of the relevant authorities and from relevant legislation.

Results

Although this is legally permitted, in practice compliance option providers do not sell compliance option certificates themselves but instead through one or more brokers (e.g., STX, OLX, SCB, Marbridge, AFS, and OTC flow). These brokers collect offers and bids and establish contact between the quota obligator and the compliance option provider. The quota trading contract is concluded between the compliance option provider and the quota obligator.

The compliance option certificates are traded in euros per ton of emission mitigation. A distinction must be made between prices for compliance options with sub-quota and those without (no cap). The prices of the compliance option certificates fluctuate strongly over the course of a year. Figure 4 shows the bid and offer prices for no-cap certificates in 2022 based on data from a broker.

Fig. 4

Bids, offers, and expected prices for no cap compliance option certificates in 2022

Two limitations must be acknowledged with respect to the research method. Due to the small sample size of interviewees, caution must be applied regarding the prices of compliance option certificates, as the results may not be generalizable to all markets. In addition, the expert interviewees were all pooling firm members, so the responses may have been subjective and, therefore, susceptible to bias. It can be assumed that the actual transaction prices are between bids and offers. The average price, which is the average of bids and offers over the year, is 459 €/t CO_2eq (gray dotted line in Fig. 4). The survey of sellers of compliance options from the no-cap sector showed that the actual transaction prices averaged 459 €/t CO_2eq over the year. Therefore, the assumption seems plausible. On the one hand, price fluctuations depend on demand for fossil fuels and the deadlines for submitting documents to prove compliance with the quota (price dip in week 15). On the other hand, prices depend on the number of compliance options placed on the market. From a market economy perspective, the upper price limit can be assumed to be determined by the regulative penalty of 600 €/t CO_2eq in the event of non-fulfilment of quota obligations (Sect. 37c, para. 2, cl. 5 BImSchG, [23]).

The prices for fuels with sub-quotas are lower than those for fuels without a cap, because the ratio of demand to supply for compliance options without a cap is higher. Data series for compliance options with a sub-quota are unavailable because this market is too illiquid, and trades do not occur every week. In general, the price for crop feedstock is about 20 €/t CO_2eq, and for non-crop⁶ 10 €/t CO_2eq below the no-cap quotation. This difference can vary depending on supply and demand. It is important to note that the emission factors for the fuel represented by the quota certificate may also vary [25]. UERs are also traded separately. The overall decline in prices during the year is not unusual. The reason for this is that obligated parties usually buy from stock in the first half of the year (due to the fact that excess savings can be carried over to the following year). The small price increase at the end of the year is due to subsequent purchases.

A comprehensive comparison of credit and certificate prices in the German GHG quota system, the Californian LCFS, the UK–Colombian LCFS, and the Clean Fuels Program in Oregon reveals both similarities and differences in price development and market stability. Prior to 2019, prices in Germany were between 150 and 200 €/t CO_₂eq. California and British Columbia had similar values of 150 to 200 US$/t CO_₂eq, as the markets were already well established [30, 31]. Oregon had a much lower price level of 50–100 US$/t CO_₂eq due to a less developed market and lower demand [32].

From 2019 onwards, there was a significant price increase in all markets. In Germany, the increase in the quota from 4% to 7% led to a sharp increase in demand, with prices peaking at up to 530 €/t CO_₂eq. In California and British Columbia, prices rose to similar levels of up to 530 US$/t CO_₂eq, driven by stricter reduction targets and growing demand [30, 31]. Oregon saw only a moderate price increase to 120–160 US$/t CO_₂eq, which continues to reflect the smaller market size and demand [32].

From 2021 to 2022 onwards, the markets in Germany, California and British Columbia stabilized at high price levels. Germany and California recorded prices above 400 €/t CO_₂eq and 400 $/t CO_₂eq, respectively, while British Columbia reached the highest values (of up to 500 US$/t CO_₂eq) [30, 31]. These developments reflect increasing market maturity and stringent regulatory requirements. Oregon remained below the other systems, with stable prices between 130 and 160 US$/t CO_₂eq, illustrating the differences in market structure [32].

From 2023 onwards, prices in Germany have dropped significantly to below 200 €/t CO_₂eq. The main reasons were the increased use of a more CO₂-intensive electricity mix as a result of the war in Ukraine and the import of possibly mis-declared biofuels [33]. As a result of the sharp fall in prices and the resulting reduction in traders' margins, a number of German companies involved in greenhouse gas quota trading have gone bankrupt. In California, prices were more stable but still decreased. However, the price level was above 200 US$/t CO_₂eq [31]. This is due to an oversupply of credits (equivalent to compliance options). In British Columbia, prices remained at a relatively high level of over 450 US$/t CO_₂eq [30]. Oregon again showed less price volatility, with prices in the range of 100–140 US$/t CO_₂eq [32]_.

Price differences can be attributed to several factors, ranging from regulatory stringency to market maturity and external influences. California and Germany have seen the highest prices, mainly due to their ambitious climate targets and strict regulations. However, when market mechanisms fail, for example due to oversupply, prices can fall drastically.

Market maturity also plays an important role in the price differences. California has one of the oldest and most established markets, resulting in high stability and robust trading volumes. British Columbia has similar characteristics, but in a smaller market environment. Germany, in contrast, is a comparatively young market with its GHG quota and is, therefore, more susceptible to fluctuations. This was clearly evident in 2023, when prices in Germany fell below 200 €/t CO₂eq. External factors had less impact on the more stable markets in California and British Columbia.

By 2030, the quota q will be raised to 25% and, at the same time, compliance options are expected to increase [34]. Therefore, substantial price uncertainty can be expected.

With the system change in the crediting of electricity for the operation of electric vehicles, the market has opened up for many partly private providers of fulfilment options, most of whom are not familiar with the quota trading system. For this reason, intermediaries, the so-called "poolers", became standard, acting as service providers to sell the saved emissions from operators of public charging stations and the owners of electric vehicles to the obligated parties. In early November 2022, there was an adjusted number of about 60 pooling firms.⁷ This number fluctuates considerably, especially since there are many pooling firms with speculative business models.⁸ We expect there to be fewer poolers in the future. There are many different types of poolers. These include firms that deal exclusively with the collection of GHG savings in the business-to-consumer (B2C) sector, in the business-to-business (B2B) sector, or both sectors, plus various firms whose core business is not GHG quota trading (such as electricity providers, insurers, car dealers, etc.), non-governmental organizations, and the quota-obligated firms themselves. Further research is needed here to clarify the competitive environment in the market for compliance option certificates for charging electricity.

The poolers first obtain certification from UBA and then sell large bundles of compliance option certificates to the quota obligators, usually with the help of a broker. The operators of the charging stations or the owners of the electric vehicles receive a premium for the distribution of the charging electricity, which consists of the remuneration of the distributors of fossil fuels minus a margin for the brokers and the poolers.

In 2021, the quota obligators sold their fossil fuels mostly via more than 14,000 public filling stations and about 350 motorway filling stations in Germany [35].⁹ In addition to the major oil firms (Shell, BP/Aral, ExxonMobil (Esso), ConocoPhilips (Jet), and Total Energies), there are numerous independent firms in the fuel market, most of which are organized in the form of federal associations (Bundesverband Mittelständischer Mineralölunternehmen e.V. and Bundesverband Freier Tankstellen). However, the large oil firms dominate the market, with a market share of around 70% [38].

In Germany, only fuels that meet the requirements of the German or European standard specified in the 10th BImSchV may be marketed. These include fuels with a biogenic content of 5–85% and so-called high-performance fuels without biogenic content [35]. The blending of biofuels enabled by far the highest GHG savings up until 2021 and thus had the most significant impact on fulfilling the GHG quota, as shown in Fig. 5. The lower share of GHG mitigation from biofuel admixture in 2021 is due to the loss of the ability to carry forward emissions savings from 2019 to 2020. Therefore, savings from both 2019 and 2020 had to be carried over to 2021.¹⁰ As shown by the zoomed-in GHG emission mitigations in 2021 that were not achieved via admixture (second right column in Fig. 5), hydrogen and electricity, in particular, played almost no role in meeting the quota until 2021. However, they have been eligible since 2018. The reason for the slight increase in the use of electricity in 2021 is unclear. One possible explanation could be a premature anticipation of regulatory changes from 2022 onwards. In 2022,¹¹ the picture changed further, as conventional biofuels were limited and the share of the mitigation from electricity in particular kept on increasing, as this fuel can be counted multiple times towards the quota by multiplying the fuel’s energy content by a factor of three (Sect. 14, para. 5, no. 1; Sect. 5, para. 2, no. 1, 38th BImSchV, [24]).

Fig. 5

Share in GHG mitigation by energy source from 2016 to 2022, based on data from the German Central Customs Authority [40]

Obligated parties aim to keep the cost of quota compliance as low as possible. This can be seen by considering the share of each compliance option in the GHG mitigation and the amount of energy used to achieve it. The share of energy used to meet the GHG Quota is shown in Fig. 6. Although LPG has only a small GHG mitigation effect, in the years in which it is allowed (2018 to 2021), LPG was predominantly used to meet the quota compared to the other compliance options. This is probably because LPG was particularly cheap to market. Blending still makes the most significant contribution to GHG mitigation (see Fig. 5), because the specific emissions of biofuels are significantly lower than those of LPG.

Fig. 6

Share of energy used to meet the GHG quota from 2015 to 2022, based on data from the German Central Customs Authority [40]. Note: Fatty Acid Methyl Esters (FAME), Vegetable Oil (VO), Hydrotrated Vegetable Oil (HVO), Compressed Natural Gas (CNG), Liquified Natural Gas (LNG), Liquified Petroleum Gas (LPG)

Although overall GHG reductions appear to be increasing, this impression is deceptive. Actual GHG emissions have decreased. This is due to the inclusion of individual compliance options with increased factors, as well as increased fossil fuel use [41]. From 2022 onwards, the GHG mitigation from the marketing of LPG dropped to zero, as low emission fossil fuels could no longer be used to meet the quota. In 2021, the German electricity mix (basis for 2022) was relatively CO₂-unintensive, leading to an increased emissions mitigation in 2022. As previously stated, the situation is likely to have undergone a notable transformation once more in 2023.¹² This is due to the import of substantial quantities of biofuel designated as sustainable from China, coupled with a notable increase in the CO₂ intensity of the electricity mix in 2022. This is, in part, attributable to the war in Ukraine.

No data are available on the quantities placed on the market by the quota holders themselves and covered by quota trading, but the largest quantities of energy and savings were achieved through blending, most likely by the quota holders themselves.

In addition to the distributors of gasoline and diesel fuel, other market players are involved in GHG quota trading: the distributors of compliance options (who are partly identical to the quota-obligated parties) and the consumers of fuels. The motives of compliance option sellers cannot be described in general terms, as they depend on whether the quota-obligated parties’ market low emission fuels to comply with the quota or purchase compliance option certificates. If the former is the case, it is only important to sell the compliance options at the highest possible profit or the lowest possible loss. Quota obligators aim to avoid having to forego the sale of fossil fuels to meet the quota. Sellers of compliance options who are not subject to the quota also seek to maximize their profit, but their profit consists not only of the costs and proceeds from the sale of the compliance options but also from the sale of the compliance option certificates. Accordingly, high GHG quota compliance costs are more advantageous to them.

Fuel consumers' motives are not purely economic, as evidenced by their stated preference for E5 over E10 fuels [35]. In addition to cost minimization, habits, personal attitudes, and other issues may play a role. This is an area for further research and beyond the scope of this paper. However, the following subsection discusses the interactions between the different markets in some more detail.

Discussion

In this section, we examine the diverse effects the trading system has on the affected markets. These interconnected effects help illustrate the system’s broader implications, including its influence on market dynamics, policy interactions, and overall environmental outcomes.

An analysis of the interactions of all the markets involved, as well as the influence of and on the quota, is beyond the scope of this study but deserves further research. However, some examples of interactions are described to demonstrate the complexity of the GHG quota scheme.

Figure 7 shows a schematic illustration of the supply and demand curves for the gasoline and compliance option certificate markets.

Fig. 7

Schematic representation of the gasoline market and the compliance option certificate market

The demand for gasoline results from the intersection of the marginal demand and supply functions (Higher prices incentivize fossil fuel distributors to increase production or imports because of greater potential profits. Higher prices discourage consumption, causing a downward shift along the demand curve.). The GHG quota imposes costs on gasoline sellers. These costs increase the price of gasoline. As a result, the demand for gasoline decreases, albeit expectedly only slightly, because the demand for fuel is relatively inelastic [42]. As the demand for gasoline decreases, the absolute amount of GHG emissions and energy required by the obligated parties decreases, and the demand for compliance option certificates also decreases. This decrease in demand, in turn, causes the price of compliance option certificates to decrease (also shown in Fig. 7). Thus, the cost caused by the quota decreases, which ultimately causes the price of gasoline to decrease. The decline in the gasoline price, in turn, increases the demand for gasoline, which increases the absolute number of certificates needed. This cyclical feedback highlights the complexity of dynamic market adjustments under the GHG quota. Figure 8 summarizes these effects again using gasoline as an example. Although the price increase is unlikely to be equal to the price drop (price symmetry), and although the market price (in the absence of exogenous influences) would asymptotically approach a fixed price, it should be noted that the price of gasoline fluctuates on its own, even with an unchanged GHG quota and constant exogenous influences.

Fig. 8

Price fluctuations as a result of introducing the GHG quota

As noted above, firms subject to the quota can reduce their share of fossil fuel by selling compliance options or buying certified energy and GHG mitigations. In the first case, the firms face costs caused by lost profits. In the second case, they incur costs for procurement or production of compliance options but also profit by selling them. They will only buy certified energy from other parties if it is neither economically efficient for them to produce all the energy, they need from compliance options, nor to reduce their fossil fuel sales. Thus, market participants constantly balance economic efficiency against regulatory compliance, creating further complexity, as discussed in the following.

On the one hand, the demand for the compliance option certificates depends on the profit from the sale of fossil fuels, which in turn depends on the market prices for fossil fuels, which in turn are influenced by the quota and the financial burden it places on the quota obligators. On the other hand, the demand for compliance option certificates depends on the price of the respective compliance options. This price results from the market equilibrium derived from the demand curve for each compliance option and the marginal cost of that compliance option’s production. The demand curve is influenced by, among other factors, the prices of fossil fuels specifically, the price rises for diesel and gasoline (e.g., due to the quota), and the fact that consumers may be inclined to switch to vehicles with alternative drive systems. This third effect will increase in the future as technological progress and infrastructure development reduce the competitive disadvantages of vehicles that run on compliance options [43,44,45]. However, one limitation of this analysis is the lack of detailed longitudinal data to quantify these demand shifts across different market segments. Similarly, the price elasticity estimates for compliance certificates remain underexplored, creating uncertainties in predicting future market behavior.

The ability to pay suppliers of compliance options for the sale of these options has another effect. The proceeds from the sale reduce the cost of the compliance options. This also lowers the market equilibrium price on the markets for compliance options, which in turn increases the loss that the quota-obligated firms incur by putting the compliance options on the market themselves. These relationships are illustrated in Fig. 9. As a result, quota obligators may be more inclined to purchase the compliance option certificates, which in turn affects the market equilibrium price of these certificates, and thus the market equilibrium price of fossil fuels, further fueling the process described above and shown in Fig. 9. The descriptions of interactions are hypothesized only. They depend on market behavior and require validation through comprehensive empirical studies that integrate both consumer and producer data.

Fig. 9

Interactions due to different ways of meeting the GHG quota

None of the markets (compliance option markets, fossil fuel markets, or compliance option certificate market) can be examined in isolation due to their interrelatedness. Therefore, all markets must be considered jointly in an economic analysis.

However, what is missing from this analysis is a deeper exploration of how exogenous shocks, such as geopolitical events or major changes in renewable energy policy, impact these interconnected markets. Such shocks could disrupt the balance between compliance certificate supply and demand, amplifying price volatility. In addition, the role of intermediaries (e.g., pooling firms) in shaping these market dynamics remains insufficiently analyzed and warrants further investigation.

The interaction of the different markets affected by the quota is complicated, because, in addition to the GHG quota trading, other environmental policy instruments have been introduced in Germany to internalize the external effects of transportation. These environmental policies and the GHG quota trading have interactive effects. Within the policy package, a particular focus is on policies to promote electric cars. These instruments and the GHG quota influence the market for compliance option certificates, which certifies electric energy used in electric road vehicles.

Due to its design, owners of electric vehicles can benefit from the GHG quota trading. The compensation from the sale of the compliance option certificate corresponding to the vehicle is, like the environmental bonus, a subsidy that makes purchasing a purely electric car more attractive. The environmental bonus is a grant of €6750 (€4500 government share + €2250 manufacturer share) that vehicle owners receive once they register a new electric car [46]. However, while the environmental bonus decreases digressively from 2023, the premium from the sale of the certificates could increase in the coming years as the share of renewables in the German electricity mix increases [41]. Proceeds from the sale of the compliance option certificates may help mitigate a possible decline in demand for electric vehicles caused by the reduction in the environmental bonus.

The EU Council and Parliament decided that zero fleet limits will apply to newly registered passenger cars from 2035 onwards [47]. A zero-fleet limit value means that no more GHG emissions may be caused by driving with all newly registered passenger cars in the EU. Therefore, all newly registered cars will no longer be allowed to burn fossil diesel or gasoline. Fleet limits consequently dramatically reduce the demand for fossil fuels and increase the supply of compliance option certificates, resulting in meager prices for the latter that significantly reduce the incentive to substitute fossil fuels with low emission fuels [41].

The National Emissions Trading Scheme puts a price on GHG emissions from transport and heat generation. In the first phase, this will be a fixed levy ranging from 25 €/t CO_2eq in 2021 to 45 €/t CO_2eq in 2025.¹³ In 2026, there will be a switch to certificate trading, in which a limited volume of emission allowances will be auctioned within a price corridor of 55 to 65 €/t CO_2eq (BEHG, [49]). The German government excludes hydrogen and fuels of biogenic origin that meet the sustainability criteria of the Biofuel Sustainability Ordinance from GHG pricing. E-fuels are treated the same way as fossil fuels, and distributors of these fuels are required to purchase allowances. The charged parties are, therefore, partly identical to the quota-obligated parties.

Although the German energy tax has to be paid for each liter of fuel, it has a similar effect as the financial burden resulting from the National Emissions Trading Scheme. The tax is also levied on sellers of fossil and synthetic fuels unless the fuels meet the criteria for biofuels or are associated with emission-free use (EnergieStG, [50]). The financial burden of the energy tax, converted to the emissions of one liter of fuel, ranges from 58 to 64 €/t CO_2eq. GHG pricing and the price change resulting from GHG quota trading have different effects on consumer prices. While GHG taxes create a greater incentive to avoid fuels in general [41], GHG quota trading creates an incentive to avoid fossil fuels without imposing the exact cost on consumers [14]. By combining the two instruments, the burden on consumers and the associated reduction in demand can be controlled. The combination of GHG quota trading and a classic allowance trading system results in lower obligations for fossil fuels under the allowance trading system [14]. These reduced obligations diminish the abatement effect of the allowance trading, as the price of allowances falls [51,52,53,54], making a reserve to which excess allowances are transferred mandatorily.

Conclusions and outlook

The GHG quota trading overlaps with the standard scheme and allowance trading and, therefore, falls under the category of tradable performance standards. However, it also contains aspects of a subsidy. Although the system is similar to other environmental policy instruments, such as the Green Electricity Certificate Trading or the California Fuel Standard, it has certain characteristics that make it challenging to evaluate and compare with other instruments. These characteristics include the fact that the quota interacts directly or indirectly with several different markets (e.g., markets for fossil fuels, markets for compliance options, and markets along compliance option value chains). In 2022, the average price of compliance option certificates was 459 €/t CO₂eq, reflecting the early stages of market development and the economic incentives created by the system. Despite these promising features, the system faces challenges that limit its current impact. For instance, geopolitical disruptions, such as the war in Ukraine, have highlighted the vulnerability of interconnected markets, amplifying price volatility. In addition, the complexity of overlapping policies—such as GHG taxes, National Emissions Trading Scheme, and direct subsidies—can create inefficiencies and distort market signals.

Given the complexity of the topic, this study can only provide an overview and offer some ideas for further research. What needs to be clarified now are the competitive conditions in the market for compliance option certificates and the influence of fuel consumption patterns on the impact of the GHG quota. It would also be interesting to look closer at the market for compliance option certificates for charging electricity.

Appendix

See Tables 1, 2 and Fig. 10.

Table 1 Guiding questions for the semi-structured interview

Table 2 Overview of the compliance options, stipulated in Sect. 37a, para. 5, BImSchG [23] for 2022–2030, as of October 19, 2022

Fig. 10

Bids for the no crop compliance option certificates in Germany in 2021