Green incentives

The German government's idea of ecological tax may seem impressive, but it hasn't got too many takers. There are too many contradictions, say critics of the green fees

Published: Monday 15 March 1999

Green incentives

-- looking for a remedy for economic recession, unemployment, climate change and resource depletion? Try ecotax. That's what the new German coalition government is planning to do. Come April 1, the entire manufacturing sector might have to pay ecotax.

Advocates and supporters of an ecological tax reform like Ernst Ulrich von Weizsaecker, president of the Wuppertal Institute for Climate, Environment and Energy, Germany, strongly believe that the wise use of green fees can help solve many problems of highly-industrialised countries. And pioneers will reap additional benefits, thanks to their technological lead, they argue. But implementation proves to be difficult. At least one pioneer, the German coalition government, is facing a heavy barrage from many people and unions, which threaten to clobber the whole concept of ecological tax.

On the face of it, the idea of using market instruments like the ecotax system to support environmental objectives is convincing.

Ecologically-harmful factors like fossil fuel and nuclear energy, toxic chemicals or the use of water and other resources are being made more expensive. The revenue, thus generated, will be used to reduce social welfare fees shared by employers and employees, compensating them for increased production or energy costs. Economic growth will be stimulated by forcing industries to develop energy efficient products, resources will be saved and new jobs created. Economically, it makes more sense to make energy "unemployed" rather than people, says Weizsaecker. Increasing productivity of resource use gets priority over increase in labour productivity.

A step-by-step increase in the green fees over a period of time would allow the industry to adjust to higher costs by introducing new, environmental-friendly technology and thereby improving energy efficiency.
Making a headway With around four million people registered unemployed -- more than 10 per cent of Germany's total working population, unemployment is the main economic problem in the country. It was also the main issue of the recent general elections.

The victory of the Social Democratic Party ( spd ) and the formation of a coalition government with the Green Party as a junior partner in October 1998 raised expectations about a fundamental political change and an innovative policy.

One of the first initiatives of the new Federal government was the announcement to introduce an ecological tax reform which, after years of heated discussions, has achieved a wider acceptance, at least in principle. While the Social Democrats see it more as a tool to create employment, members of the Green Party like Reinhard Loske, who is also a member of Parliament, see it as a key instrument for the ecological modernisation of Germany. Environmental organisations like the Deutscher Naturschutzring feel that it is essential for a sustainable economy.

The coalition agreed upon a head-on start soon after assuming power. As the first step, an additional tax on gasoline was fixed at four cents, an increase of less than five per cent, much less than what the Greens felt was necessary. Petrol prices in Germany are among the lowest in Europe.

Before the general elections, the Greens had called for tripling of the gasoline price to us $3 within 10 years. This created a public outcry, reducing their popularity considerably. The green fees on power, gas and fuel are similarly modest.

The additional revenue from the ecotax is being estimated at us $6.5 billion, enough to reduce labour costs by 0.8 per cent. Two more hikes will follow within the next four years, but they will be harmonised with other European countries to pre-empt complaints from industry about competitive disadvantages.
Going gets tough There has been a lack of courage, says a disappointed Michael Kohlhaas, an economist who earlier advised the spd on the tax reform. Obviously, the party leadership was afraid of the objections against higher petrol prices by the powerful car manufacturers and the strong lobby of private car owners, organised by the Allgemeiner Deutscher Automobil-Club ( adac ), the world's biggest automobile association with nearly 14 million members.

Now, most of the us $2.5 billion revenue will come from higher electricity prices. For Jochen Flasbarth, president of the nature conservation organisation Naturschutzbund, this is a flaw in the construction of the proposed reform because such fees on electricity take neither the varying ecological hazards of different energy resources into consideration, nor the efficiency of power plants.

Despite the modest cost increase brought about the ecotax, which was largely compensated by reduced social welfare fees, all hell broke loose as soon as the plans were announced. The reform was called socially unjust, chaotic, complicated, fiscally arbitrary, economically disastrous and ecologically-ineffective.

Expectedly, the industry complained about too high a burden. Earlier, it was decided that the manufacturing industry will pay only 25 per cent of the increase, and 27 energy-intensive sectors like cement and aluminium production would be exempted altogether. The lobbyists demanded a 100 per cent exemption for industry as long as competitors in other European countries do not face a similar tax. Then, the European Commission interfered and objected to the exemption from ecotax for the 27 sectors. The new, and seemingly "final", proposal now is that the whole manufacturing sector will have to pay ecotax, but only 20 per cent of the normal rate.

Environmental organisations like the Bund Umwelt und Naturschutz ( bund) were critical too. Although they were happy that at least a first step had been taken, the cost increases were considered too low to make an ecological steering effect, as Angelika Zahrnt, chairperson of bund says. Flasbarth of Naturschutzbund feels that 20 per cent more per litre per year would be the appropriate dimension.

Further, several other contradictions were pointed out. Environment-friendly energy like solar energy is taxed as much as power from fossil fuels like coal. Comparatively environment-friendly gas-fired thermal plants face a double burden by taxing gas as well as electricity. And public transport faces the same burden as private cars. Negative side effects could affect students, senior citizens and low income groups, who have to pay for increased energy costs but are not compensated adequately. So a diverse coalition of trade unions, welfare organisations, environmentalists, industrialists and farmer organisations are demanding further improvements before the reform comes into force on April 1, 1999.

Economist Rudolf Hickel from Bremen University points out that there will be little positive impact on the labour market. The ecological tax reform, as it stands now, is not more than a modest beginning, agrees Kohlhaas. It is no short term wonder drug, he says. Clearly, much more substantial increases are needed to achieve results. But with strong opposition from industry, fears of a negative impact on economic growth and ecological considerations weakening, there is a danger that the ecological tax reform will be pulverised between conflicting interests. We have to be cautious that the ecological tax is not misused just to supplement government's coffers, warns Reinhard Loske.

Uwe Hoering is a freelance journalist, based in Bonn

Subscribe to Weekly Newsletter :

Comments are moderated and will be published only after the site moderator’s approval. Please use a genuine email ID and provide your name. Selected comments may also be used in the ‘Letters’ section of the Down To Earth print edition.