From Split Incentives to Shared Responsibility: Evaluation of Germany’s Carbon Cost Allocation Law for Rental Buildings

The introduction of the EU Emissions Trading System 2 (EU-ETS 2) will extend carbon pricing to the buildings and transport sectors across Europe. While carbon pricing is a central pillar of the EU’s decarbonization strategy, its effectiveness in the rental buildings sector is inherently limited: landlords make investment decisions, but tenants bear the energy costs. The split-incentive problem weakens the price signal and risks undermining both fairness and climate impact. In 2023, Germany introduced an innovative policy response: a graduated cost-splitting mechanism between landlords and tenants that links the share of carbon price costs to the building’s energy performance. This paper presents the first empirical evaluation of this policy, combining stakeholder interviews, a survey covering around 400 landlords, metering companies and property managers, and analysis of metered consumption data to assess how the cost-splitting mechanism is being applied in practice. The results show that the mechanism performs reliably across most building segment: In buildings where consumption-based metering and billing are in place, implementation is straightforward, and disputes are rare. By contrast, in single family homes and flats with individual heating units, administrative burdens and errors increase. The findings indicate that Germany’s model offers valuable lessons for other Member States preparing for EU-ETS 2, demonstrating that targeted cost allocation rules can strengthen both the effectiveness and the fairness of carbon pricing in the buildings sector.