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London — The German cabinet has agreed a new CO2 price for transport and heating to start next year at Eur25/mt, economy and energy minister Peter Altmaier and environment minister Svenja Schulze said Wednesday.

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Income from the "carbon tax", which is set to lift gasoline prices by Eur0.07/liter, would help offset increases in the country's EEG green energy levy, the ministers said.

Germany last October decided to extend carbon pricing to transport and heating, sectors not covered by the EU's Emissions Trading System.

The tax had been set to debut at Eur10/mt ($11/mt) from 2021, the government said in October when it signed off a 2030 climate plan.

Facing opposition in the upper house late last year, the opening price was lifted to Eur25/mt for 2021, rising each year to Eur55/mt by 2025.

From 2026, auctions will replace the fixed price within a price corridor set at Eur55-Eur65/mt, the government said.

The tax would lift diesel and heating fuel oil prices for consumers by Eur0.08/liter and natural gas by Eur5/MWh for end-consumers, the ministers said.

The cabinet also approved regulation (EEV) that will see income from the carbon tax flow into the EEG account.

The changes still require parliamentary approval in order to be applicable for 2021 with the green levy (EEG-Umlage) set by mid-October.

"Today's decisions show that it is possible to combine climate protection and social fairness," environment minister Svenja Schulze said.

Higher CO2 prices would incentivize purchasing decisions on cars and heating systems with income flowing back to energy consumers via a lower EEG levy or commuter tax allowances.

Germany's renewable energy support account (EEG-Konto) is facing a shortfall next year after record renewable generation and lower market prices trimmed the fund by over Eur4 billion year on year.

That trend set to continue over the summer, lifting the EEG levy for 2021 sharply, potentially adding political pressure in the wake of the corona crisis and ahead of 2021 elections.

Last year the levy was raised 5% to Eur67/MWh for 2020. Germany's biggest utility E.ON estimates it could rise above Eur80/MWh next year.

The account pays out over Eur25 billion each year to over 100 GW of wind, solar and biomass plants, bridging the gap between legacy feed-in-tariffs and wholesale market prices.