Taxing reforms

Germany's new ecological tax reforms are ridden with flaws

By Stephan Singer
Published: Saturday 15 May 1999

-- one of the most prominent measures proposed by the European Union ( eu ) countries to meet climate commitments has been introducing carbon/energy taxes. However, the 15-member eu is yet to agree on a carbon policy unanimously. Denmark, the Netherlands, Finland and Sweden have taken the lead in implementing some energy taxes individually, but these taxes are far from being ambitious. Economic competition within the eu has prevented them from taking any severe measures to reduce greenhouse gas ( ghg ) emissions. Germany, which accounts for about one-third of eu 's ghg emissions and almost 40 per cent of the eu 's gross domestic product had been one of the major opponents to a coordinated eu approach.

However, all this has changed after the Red-Green coalition government assumed power in Germany in October 1998. They have introduced the most ambitious of all eu schemes to cut down on emissions. The tax reform is aimed at reducing employers' contributions to pension funds by about 2.4 per cent. Subsequently, the entire employment-linked expenditure will be reduced by 40 per cent. Employers will invest in cost-effective measures. If labour is more expensive than energy or any other natural resources, resource-intensive production schemes will be used. And, if labour is cheaper, the economy will turn labour-intensive. Energy-efficient and carbon-saving solutions such as construction of low energy housing, heat insulation, and expansion of renewables are labour-intensive. Thus, incentives will be given to such solutions.

The reform will take place in three consecutive steps within two years, each yielding about 0.8 per cent reduction of labour costs. An estimated 8.5 billion Deutsche Mark ( dm ) is expected to be raised in the first year itself, with effect from April 1, 1999.
Flaws in plenty It should be seen as a very positive development that, after strong protests by many constituencies, the first draft proposal has been considerably improved. But the tax still has serious shortcomings.

All manufacturing companies and agricultural entities, however, will pay only 20 per cent (of 0.02 dm per kw/h) of the agreed rates on fuels and electricity. Further, there is no exemption for energy-intensive industries as earlier planned. No difference has been made regarding tax rates between energy-intensive industries and normal industries. "Bad" companies pay the same as very efficient ones. However, it has been agreed that wherever the implemented tax burden is higher than the reduction of labour costs, the company will receive compensation by a further decreased tax rate.

But ecotax proposals have certain weaknesses. Although the government showed support for implementation of solar programme for photovoltaics on 100,000 roofs, renewable energy has not been exempted from electricity tax. Also, natural gas-fueled power plants which are cost-effective and relatively more environmental-friendly, will be double taxed in comparison to nuclear and coal-fired power plants. This is because natural gas is taxed as fuel as well, whereas coal and nuclear material are not.

Agriculture and public transport are not spared either. The railways with about 80 per cent dependence on electricity will have to compensate for about 7 per cent higher electricity costs. This is about 1.5 times more "eco" taxes than for the direct competitors, such as lorries and cars, which pay mineral oil tax. And air transport is fully exempted from the ecotax. The additional net burden for the railways will amount to approximately 150 million dm in the coming year.

The tax rate of only 0.06 dm /litre (l) mineral oil is ridiculously low and will not even compensate for the decrease in gasoline prices of about 0.15 dm /l in 1998, resulting from the worldwide decrease of oil prices.

However, it would be too impractical to believe that all these shortcomings have been intended. They are a result of chaotic and sometimes amateuristic negotiations, besides being a victim of eu require ments which reportedly do not allow tax exemptions for certain types of fuels (renewables) under a liberalised electricity market.

Finally, the current ecotaxes reflect a compromise between the real Green proponents and the mighty car and coal lobby in the Social Democratic Party ( spd )-led government. For instance, a tax increase of 0.06 dm per litre for gasoline was not negotiated but set as a publicly promised "ceiling" before the elections by chancellor Gerhard Schrder. Some say that with tougher and more stringent tax rates for coal and nuclear power as compared to natural gas, the coal lobby of the spd would have voted against the other driving energy policy principle of the coalition -- nuclear phase out.

Stephan Singer is director of energy policy, Worldwide Fund for Nature-Germany

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