Opportunities and pitfalls when including the CO2 shadow price in award procedures under German legislation

In accordance with Section 10 of the Federal Climate Protection Act (Bundes-Klimaschutzgesetz - KSG), the Federal Government submits an annual climate protection report to the Bundestag, which shows the development of greenhouse gas emissions. The report  shows that Germany's greenhouse gas emissions continued to fall in 2023. Nevertheless, greenhouse gas emissions are associated with considerable social and economic costs. According to the Federal Environment Agency (Umweltbundesamt), 1 tonne of CO2 causes social costs of 250 EUR. This calculation also takes into account the economic costs of climate change, which the Federal Ministry for Economic Affairs and Climate Protection (Bundesministerium für Wirtschaft und Klimaschutz) estimates at between 280 billion and 900 billion EUR by 2050. The public sector can promote the reduction of greenhouse gas emissions by placing a greater emphasis on sustainability in procurement processes and taking a so-called CO2 shadow price into account in the award decision in public procurement procedures.

CO2 shadow price

The CO2 shadow price gives CO2 emissions (and other climate-damaging greenhouse gases, so-called CO2 equivalents) a notional price, which also reflects the consequential damage caused by the CO2 emissions of a product or solution. It should not be confused with the direct indication of CO2 emissions. Although these form the basis for calculating the CO2 shadow price, they can be taken into account in addition or alongside it.

Mandatory shadow price at federal and state level

For federal authorities, the obligation to include the CO2 shadow price is clearly enshrined in law in Section 13 (1) sentence 3 KSG. According to this, public authorities at federal level must apply a CO2 price (at least the minimum price or fixed price applicable under Section 10 (2) of the Fuel Emissions Trading Act (Brennstoffemissionshandelsgesetz - BEHG)) when planning, selecting, procuring and implementing investments to avoid or cause greenhouse gas emissions. This is EUR 45 per emission allowance for 2024 and EUR 55 for 2025. However, it is only clear from the explanatory memorandum to the law that this "CO2 price" refers to the CO2 shadow price.  

Although the KSG regulates an obligation to include the CO2 shadow price, it does not define how it should be taken into account in the award procedure. The way in which the CO2 shadow price is taken into account and evaluated is at the discretion of the contracting authority. Section 2 (1) no. 2 of the General Administrative Regulation on the Procurement of Climate-Friendly Services (Allgemeinen Verwaltungsvorschrift zur Beschaffung klimafreundlicher Leistungen - AVV Klima), which specifies the KSG and provides for a special economic efficiency analysis, offers assistance in this regard. According to this, after determining a requirement in accordance with Section 6 of the Federal Budget Code (Bundeshaushaltsordnung - BHO), federal government departments must include a cost-effectiveness analysis in accordance with Section 7 (2) BHO, which should include a forecast of the greenhouse gas emissions caused over the entire life cycle, insofar as this is possible with reasonable effort. The forecast of the greenhouse gas emissions caused is generally based on the specifications of the Federal Environment Agency. According to Section 2 (2) of the AVV Klima, the procurement option that can achieve the lowest cost reduction in greenhouse gas emissions over the entire service life must always be selected, provided that the resulting additional costs are not disproportionate to their contribution to greenhouse gas reduction. 

The above provisions relate exclusively to the federal level. The competences of the federal states, municipalities and associations of municipalities remain unaffected in accordance with Section 13 (1) sentence 2 KSG. They are free to provide for their own regulations in their area of responsibility. For example, the state of Baden-Württemberg was the first federal state to introduce a binding shadow price for CO2 with the adoption of the Climate Protection Act on 1 June 2023 (Klimaschutzgesetz Baden Württemberg - KlimaG BW), which must be taken into account in construction projects (see Section 8 (1) KlimaG BW). This corresponds to the value scientifically determined and recommended by the Federal Environment Agency for each tonne of carbon dioxide produced over the life cycle of the measure. The CO2 shadow price should also be applied to the procurement of goods and services by the state. In this respect, according to Section 5.2 of the administrative regulation of the state government on the award of public contracts dated 23 July 2024 (Verwaltungsvorschrift der Landesregierung über die Vergabe öffentlicher Aufträge - VwV Beschaffung), a calculated CO2 shadow price should be estimated for the procurement of supplies and services by the state as part of the economic feasibility study, which corresponds to the value scientifically determined and recommended by the Federal Environment Agency for each tonne of carbon dioxide (CO2) generated over the life cycle of the measure. Exceptions can only be considered for procurements with a contract value of less than EUR 100,000 excluding VAT or if no reliable and robust assistance is available for calculating the CO2 emissions of the procured services or product groups. 

In Section 5.6.2 of its own administrative regulations on sustainable procurement (Verwaltungsvorschriften zur nachhaltigen Beschaffung - VV-NB), the state of Lower Saxony has also stipulated that the CO2 shadow price can be applied at least in the amount of the minimum price or fixed price applicable under Section 10 (2) BEHG, but only in the context of the economic viability study and only insofar as the monetary valuation of greenhouse gas emissions is possible.

No budgetary concerns

The consideration of shadow prices in the context of public procurement can be questionable, particularly from a budgetary perspective, if this makes a particularly favourable and economical solution artificially more expensive by adding fictitious CO2 costs. 

However, the Federal Audit Office (Bundesrechnungshof) already emphasised in 2022 that sustainability - and thus also climate protection - must always be taken into account in the performance audit in accordance with Section 7 BHO. This can certainly lead to an alternative action being cost-effective when sustainability aspects are taken into account, which would have been uneconomical without taking these aspects into account due to the additional expenditure associated with them.  The Federal Audit Office is likely to continue to follow this principle, as the performance audit is intended to prepare the decision on a financially effective measure. It must take into account all factors relevant to the decision - and therefore also sustainability aspects.  

Accordingly, there should be no fundamental budgetary objections to taking the CO2 shadow price into account in public procurement procedures, as sustainability is now a recognised and necessary component of the economic efficiency assessment.

General requirements under public procurement law

Regardless of where or in which phase of an award procedure the CO2 shadow price is taken into account by the contracting authority - as a suitability requirement, exclusion or award criterion or as a special implementation provision - the principles of transparency and equal treatment under public procurement law from Section 97 (1) sentence 1 and (2) of the Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen - GWB) must be complied with.  

When including both the CO2 shadow price and the CO2 emissions, it would therefore first have to be checked whether CO2 emissions or CO2 shadow prices exist at all for the procured services or can be determined by the bidders at short notice. Accordingly, the aforementioned Section 5.2 of the VwV Beschaffung in Baden  Württemberg already stipulates that the CO2 shadow price is not to be estimated if no reliable and resilient assistance is available for the calculation of CO2 emissions of the service or service or at least product group.

Overall, care should be taken to ensure that the tender documents contain precise specifications for the calculation of the CO2 emissions and the CO2 shadow price. When selecting the method for calculating the CO2 shadow price, the contracting authority must ensure that it is based on objectively verifiable and non-discriminatory criteria. For example, it would have to be specified whether, in the case of IT hardware, only the production or also the operation is to be taken into account. A specific relevant period would then have to be specified for operation. In the case of IT software, the calculation is likely to be much more complex, as the CO2 shadow price is not calculated solely on the basis of the software used, but also on the basis of the hardware used. In the case of services, the calculation of the CO2 shadow price is likely to be even more difficult, as varying distances and remote labour may have to be taken into account, so that a clear framework must also be defined here. It should be much easier for products such as furniture, stationery, books or clothing, where CO2 emissions across the entire supply chain must also be taken into account. At the same time, it should be noted that the full inclusion of every CO2-generating item should not be mandatory under public procurement law. However, the requirements must at least be described in a transparent and non-discriminatory manner so that the tenders are comparable in terms of procurement law when taking CO2 emissions into account. 

Shadow price as an award or evaluation criterion

The CO2 shadow price may be used when evaluating the economic viability of tenders.  However, it must always be taken into account that the CO2 shadow price is a fictitious price that is intended to reflect the climate impact costs and thus increase the evaluation price accordingly but is not to be paid by the client to the contractor. 

Contracting authorities have the option of defining the shadow price as a separate award criterion alongside the quality of the service and the actual tender price. Alternatively, the CO2 shadow price can be included as an additional price item in the price sheet. 

If the CO2 shadow price is determined as a separate award criterion (CO2 shadow bid price), the following calculation is recommended:

CO2 shadow supply price = 
CO2 quantity x CO2 shadow price 

where the amount of CO2 in tonnes must be determined and stated by the bidder depending on the service offered and the relevant CO2 shadow price in euros/tonne of CO2 emissions is specified by the contracting authority in the tender documents.

If the CO2 shadow price is to be taken into account as part of the price surcharge criterion, the following calculation can be used:

Valuation price = offer price + CO2 shadow offer price 

where the offer price is the sum of all price items of the respective offer in euros and the CO2 shadow offer price is the notional surcharge in euros according to the above calculation method.

As the contracting authority only has a limited right of determination when defining the award criteria, it can specify the relevant CO2 shadow price itself (see the item "CO2 shadow price" in the above calculation method). In this respect, the question arises for contracting authorities as to which value may be applied in individual cases in a legally secure manner under procurement and budgetary law. Neither the KSG nor the AVV Klima specify a specific value here, but merely refer to a minimum price, which may be exceeded accordingly (cf. Section 10 (2) BEHG). This minimum price is EUR 45 per tonne of CO2 in 2024 and EUR 55 in 2025. In July 2024, the Federal Environment Agency calculated a significantly higher CO2 shadow price of EUR 250 per tonne of CO2, which has been criticised, among other things, because it reflects too many effects from the economy itself and beyond. In practice, calculations currently range from a few euros to several hundred euros per tonne of CO2. In this respect, it remains to be seen whether the first court decisions will confirm the prices permitted under public procurement law or define a more concrete framework for determining the relevant shadow prices. 

Against this backdrop, it is currently advisable to orientate yourself towards the above-mentioned statutory minimum prices. At the same time, when procuring IT hardware products such as laptops, PCs, printers, mobile phones or tablets, but also furniture or stationery, it should be expedient to have the CO2 emissions relating to production and - as far as possible - operation for a specific term specified as an alternative and to evaluate these accordingly as part of the performance-related award and evaluation criteria.

Shadow price as an exclusion criterion

It is conceivable to define certain minimum requirements for CO2 emissions in the form of a specific minimum shadow price in the tender documents as an exclusion criterion. Here too, however, care should be taken to ensure that the requirements are transparent and the same for all bidders and that they can be met.

Nevertheless, the evaluation of emissions within the framework of the qualitative evaluation criteria or, alternatively, the evaluation of the notional CO2 shadow price for the solution offered within the framework of the price evaluation criteria currently appears to be more expedient. 

Shadow price as an implementation provision

The CO2 shadow price is probably only suitable as an implementation provision in the form of certain limit values for CO2 emissions per se.

Shadow price as a selection criterion

In the context of selection, neither the inclusion of CO2 emissions nor the CO2 shadow price of the products or services offered should be permissible under public procurement law. Selection criteria must be company-related and not order- or product-related. Sustainability aspects can in any case be taken into account in the context of references on services provided with environmental relevance (cf. Section 46 (3) No. 1 Public Procurement Regulation (Vergabeverordnung – VgV)) or, if necessary, checked in conjunction with the following suitability requirements: Specification of the technical specialists or technical bodies used in the - particularly environmentally friendly - provision of services (cf. section 46 (3) no. 2 VgV); description of the technical equipment in connection with sustainability (cf. section 46 (3) no. 3 VgV); specification of the supply chain management and supply chain monitoring system available to the company for the sustainable fulfilment of the contract (cf. Section 46 (3) No. 4 VgV) or specification of the environmental measures that the company applies during the execution of the contract (Section 46 (3) No. 7 VgV).

Bidders' entitlement to shadow price evaluation 

Providers of particularly sustainable solutions may legitimately ask themselves whether they are allowed to demand the inclusion of the CO2 shadow price in an award procedure by the contracting authority or whether the determination of a certain level of the shadow price can be challenged. 

A claim by bidders to the inclusion of the CO2 shadow price in the tender documents should currently be rejected. The KSG is not a public procurement regulation, but a norm of public law that merely contains a "reflex" under public procurement law, but not a "claim". The explanatory memorandum to Section 13 KSG expressly clarifies in this regard that the provision does not have the character of third-party protection, so that bidders may not actively invoke it in an award procedure. The fundamental ruling of the Federal Constitutional Court (Bundesverfassungsgericht - BVerfG) on the objective concern of climate protection from 2021 will probably not change this. There, too, the BVerfG confirmed that no subjective rights can be derived from the state objective of environmental protection under Article 20a of the German constitution (Grundgesetzt – GG).  Finally, the limited relevance of the fundamental right to intertemporal protection of freedom (i.e. colloquially the fundamental right to intergenerational justice) is confirmed by the most recent decision of the Federal Constitutional Court from January 2022. Since the fundamental right to the intertemporal safeguarding of freedom has no "impact" on climate protection targets at state level, this must apply all the more to individual decisions in the area of public procurement law. It therefore remains the case that Section 13 KSG does not grant bidders any subjective rights. 

Something else should only apply if the contracting authority has decided to take a CO2 shadow price into account in an award procedure and has defined it as an award criterion, for example. In this case, the evaluation of the CO2 shadow price would have to fulfil the general principles of public procurement law (transparency, equal treatment and competition). In this respect, a bidder whose bid has a high proportion of CO2 could challenge the amount of the shadow price set by the contracting authority, as this can have an impact on the bidder's chances of being awarded the contract. The review bodies under public procurement law would be able to review whether the determination of the CO2 shadow price was not arbitrary (i.e. objectively justified), appropriate, related to the subject matter of the contract and did not unduly restrict competition.

Conclusion

Public procurement law has been used for some time to indirectly implement social or sustainable standards in business and society. However, there is often a lack of concrete solutions or proposals for action in this regard, meaning that public contracting authorities are confronted with a large number of unresolved issues when implementing the legal objectives. 

The consideration of the CO2 shadow price is no exception in this respect. The latest draft bill of the Federal Ministry of Economic Affairs and Climate Protection's Public Procurement Law Transformation Act (Referentenentwurf des Vergaberechtstransformationsgesetzes des Bundesministeriums für Wirtschaft und Klimaschutz) of 30 September 2024 also provides for regulations on the use of social and environmental criteria in the new Section 120a GWB, but does not go into more detail on the CO2 shadow price.

The safe handling of sustainability aspects is therefore reserved for particularly innovative public sector clients who use creative and legally compliant solutions in different phases of public procurement.