On 12 December 2025, roughly six months after the first ministerial draft was presented, the German Federal Cabinet adopted the draft Second Act to Further Develop the Greenhouse Gas Reduction Quota. The draft act transposes the requirements of the revised European Renewable Energy Directive (“RED III”) and introduces significant changes to the current legal framework. Core elements of the draft include the revision and increase of the greenhouse gas reduction quota, heightened quota compliance obligations and the elimination of double counting. Another important aspect is that the sub-quota for renewable fuels of non-biological origin is to be increased well beyond the level set out in the second ministerial draft in October 2025. Market stakeholders must expect the new act to take effect retroactively from the beginning of 2026 once the legislative procedure has been completed.
Background and objective
On 19 December 2025, the German Federal Cabinet submitted the draft Second Act to Further Develop the Greenhouse Gas Reduction Quota (“cabinet draft”) to the German Federal Council (Bundesrat) for consultation. The current draft was preceded by two ministerial drafts from June and October 2025 (see Implementing the RED III Directive – German Government Drafts Second Greenhouse Gas Reduction Quota Bill | Gleiss Lutz and Revised Draft Bill Shifts the Goalposts for the Greenhouse Gas Reduction Quota | Gleiss Lutz). The cabinet draft largely corresponds to the revised second ministerial draft from October 2025, though specific provisions have been amended and modified in the course of interministerial consultations.
The cabinet draft implements the requirements of Directive (EU) 2023/2413 of the European Parliament and of the Council of 18 October 2023 amending Directive (EU) 2018/2001, Regulation (EU) 2018/1999 and Directive 98/70/EC as regards the promotion of energy from renewable sources and repealing Council Directive (EU) 2015/652) (“RED III”), and of Regulation (EU) 2023/2405 of the European Parliament and of the Council of 18 October 2023 on ensuring a level playing field for sustainable air transport (“ReFuelEU Aviation”). The cabinet draft also prioritises promoting the ramp-up of Germany’s hydrogen economy and preventing fraud when renewable fuels are counted towards the greenhouse gas reduction quota. To that end, the cabinet draft provides for amendments to the relevant provisions of the Federal Emissions Control Act (Bundes-Immissionsschutzgesetz, “BImSchG”) and of the 37th and 38th Ordinances on the Implementation of the Federal Emissions Control Act (Verordnung zur Durchführung des Bundes-Immissionsschutzgesetzes, “BImSchV”).
Key aspects
The greenhouse gas reduction quota is the primary climate-policy steering instrument in the transport sector. Under section 37a et seq. BImSchG, fuel suppliers are obliged to cut the greenhouse gas emissions of their fuels by a given percentage per compliance year. Sustainable biofuels, electricity-based fuels produced from green hydrogen, and the direct use of electricity in road vehicles with electric powertrains can be credited towards meeting the greenhouse gas reduction quota. The cabinet draft seeks to make both the greenhouse gas reduction quota itself and mechanisms for its fulfilment considerably stricter, notably through the following:
Continued increases in mandatory reductions under the greenhouse gas reduction quota through 2040: The 53% greenhouse gas savings target from the first draft has been abandoned, as was already the case in the second draft. Instead, the greenhouse gas reduction quota is to increase incrementally to 59% by 2040, corresponding to a 62% share of renewable energy in the transport sector calculated using the RED III method. That would put Germany slightly above the EU’s minimum requirements, but below the levels advocated by certain industry associations. Under the cabinet draft, the greenhouse gas reduction quota will be increased relative to the present legal framework from the 2027 compliance year. By setting out increases to reduction quotas until 2040, the draft aims to provide greater planning and investment security for the stakeholders impacted.
New mechanism for adjusting greenhouse gas reduction quotas: Like the previous draft, the new draft fundamentally reworks the current mechanism for adjusting the greenhouse gas reduction quota: The greenhouse gas reduction quota will be able to be adjusted if overcompliance in a given compliance year exceeds a threshold defined in the act. The new mechanism is designed to provide greater flexibility and reflect developments across all available compliance options.
Application of the greenhouse gas reduction quota to road transport only: Under the cabinet draft, the greenhouse gas reduction quota will only apply to placing fuels for road transport on the market – contrary to both existing law and the first ministerial draft. Accordingly, the cabinet draft follows the second, amended ministerial draft and removes the obligations on the aviation sector set out in section 37a(2) BImSchG.
Fewer obligated entities: The cabinet draft creates exemptions for entities from the obligation to meet greenhouse gas reduction quotas, reflecting the changed security environment. Accordingly, civil protection and disaster response agencies, as well as police forces and fire brigades, are exempt from this obligation. These exemptions were already part of the second, revised ministerial draft and aim to ensure that these agencies continue to receive a reliable supply of fossil fuel.
Changes to the options for compliance with the reduction quota: The cabinet draft’s changes to the options for complying with the greenhouse gas reduction quota largely align with the changes outlined in the two previous ministerial drafts.
On-site inspections required for emission credits: According to the cabinet draft, from the 2027 compliance year onwards, renewable fuels will no longer count towards the greenhouse gas reduction quota if the competent inspection authorities are not permitted to conduct on-site inspections. This provision is also aimed at preventing fraud and was already included in the two previous ministerial drafts.
Exclusion of palm oil biofuels: From the 2026 compliance year onwards, palm oil-based biofuels will no longer count towards the greenhouse gas reduction quota. A transitional provision for palm oil residues will allow them to remain eligible through 2026 before being excluded as from 2027.
Exclusion of biofuels from raw materials with a high risk of indirect land use change: Under the cabinet draft, biofuels from raw materials with a high risk of indirect land use change will no longer count towards the greenhouse gas reduction quota from the compliance year 2026 on. However, unlike in the first ministerial draft, biofuels made from soybean oil will remain eligible for credits.
Co-processing permitted: In line with RED III, the cabinet draft allows renewable fuels of non-biological origin (RFBNOs) to count towards the greenhouse gas reduction quota even if produced via co-processing with biogenic oils. This gives refineries greater flexibility in the processing of biogenic raw materials.
Hydrogen as a new compliance option: From the 2031 compliance year onwards, it will also be possible to count electrolytic, low-carbon hydrogen towards the greenhouse gas reduction quota where it is used as an intermediate for the production of conventional fuels. This is intended to boost electrolysers usage, reduce production costs and increase the supply of low-carbon hydrogen.
Elimination of “double counting”: Double counting of advanced biofuels towards the greenhouse gas reduction quota is to be eliminated starting in the 2026 compliance year. This will not apply to fuels that were already placed on the market before 1 January 2026. Legislators pursued this change because excessive double counting previously led to significant overcompliance with the greenhouse gas reduction quota, resulting in a drop in quota prices. On the other hand, eliminating double counting is also seen as a vital step in deterring fraud and driving physical demand for biofuels. Recent cases of mislabelled biofuels highlighted the urgency of this action.
Gradual phase-out of triple counting for EV charging: The increase in production volumes and market availability is expected to lead to a drop in costs for EV charging. Triple counting, which serves to improve economic viability, will therefore be gradually phased out according to the current cabinet draft.
New sub-quota for RFNBOs: The cabinet draft introduces a minimum annual quota for renewable fuels of non-biological origin. The sub-quota is designed to accelerate the deployment and market integration of electricity-based fuels, gradually increasing from0.1% in 2026 to 8.0% in 2040. This represents an industry-friendly compromise between the 12% suggested in the first ministerial draft and the 4.0% in the second. The new sub-quota is also intended to replace the discontinued obligation to use RFNBOs for aviation. The 2026 obligation of 0.1%, which applies across the broader greenhouse gas quota, roughly corresponds to the absolute quantity of the discontinued 0.5% obligation in the aviation sector.
Updated notification deadline and entry in EU database: The deadline for affected parties to submit compliance notifications under the greenhouse gas reduction quota will move from 15 April to 1 June of the calendar year following the compliance year. In addition, the parties must enter this information into an EU database once it is operational. The database set up by the European Commission is intended to prevent triple counting of biomethane and stop double funding abuses (both in other EU Member States and in Germany).
Aviation and ReFuelEU Aviation: The cabinet draft also contains provisions for implementing the European requirements set out in the ReFuelEU Aviation Regulation. These cover the monitoring of aviation fuel suppliers, their reporting duties and applicable levies. In addition, new penalty criteria will be introduced as part of implementing the European requirements.
Conclusion and recommended actions
In the long term, the legal framework for the greenhouse gas reduction quota will become significantly more stringent and certain existing compliance options will be limited or discontinued. At the same time, new and often technologically and economically challenging options, including RFNBOs and hydrogen, will take on a more prominent role. This will result in more stringent regulatory requirements and greater strategic planning demands.
However, it remains to be seen whether the planned measures will be sufficient to actually achieve the European and national climate targets in the transport sector. In particular, the decision not to bring forward the planned increase in the reduction quota from 2028 to 2027 has been viewed critically. According to various industry associations, only an earlier tightening of requirements could reduce existing surpluses, which have emerged in part due to double counting and insufficient controls. It also remains to be seen whether the planned anti-fraud measures – particularly the discontinuation of double counting and the introduction of new control instruments – will in fact prove effective in eliminating false incentives and restoring the demand for sustainably produced biofuels.
It is also becoming apparent that the legislative process will not be completed in time to meet the 21 May 2026 implementation deadline. This could lead to considerable uncertainty for the biofuels industry and the companies subject to quotas. Irrespective of the timing of the legislative process, however, market stakeholders should already be prepared for the new measures to apply retroactively from the beginning of 2026. As the greenhouse gas reduction quota is calculated on the basis of annual emissions, the changes will take effect for the entire 2026 compliance year.
Forward
