Background

Germany is a Central European country and a founding member state of the EU. It has over 80 million inhabitants (2014 figure) and is the largest national economy in the EU with a GDP in PPP of USD 3.69 trillion in 2014. The service sector represents about 70 per cent of GDP, while industry accounts for 29.1 per cent and agriculture 0.9 per cent of GDP respectively (World Bank Data; Destatis Data). Coal represents the most important energy source, accounting for 44 per cent of total gross electricity production in 2014. Electricity production from nuclear power has dramatically decreased from 28 per cent of total electricity production in 1990 to 15 per cent in 2014. Within the framework of Germany’s Energiewende (energy transition), the share of electricity production from renewable energy sources has increased from 4 per cent in 1990 to nearly 27 per cent in 2014 (Destatis Data). CO2 emissions per capita (8.9 metric tons in 2011-15) remain above the EU average (World Bank Data). More than 40 per cent of Germany’s total area is under some form of protection, and the intensity of forest resource use has gradually decreased Despite strict water regulations and the modernisation of wastewater facilities, 82 per cent of surface water and 36 per cent of groundwater bodies are not likely to achieve water quality objectives set in the EU Water Framework Directive by the end of 2015 due to excessive nutrient loads and micro-pollutants (OECD, 2012).

Overall Fiscal Profile

Germany’s economy experienced consistent growth between 2004 and 2008 with GDP increasing annually by an average of 2 per cent in real terms, prompted by a series of reforms to address high unemployment and low growth in the aftermath of reunification. The 2008-09 financial and economic crisis led to a decrease in the country’s GDP by 5.1 per cent in real terms (the country’s worst economic performance since the Second World War). An extensive fiscal policy stimulus package (around EUR 50 billion) was launched in 2009 to deal with the effects of the crisis and supported a return to pre-recession rates of GDP growth in 2010 and 2011. The stimulus package included investment in infrastructure, tax cuts, some social benefits, and a ‘cash-for-clunkers scheme’ to support the car industry. These stabilization measures led to an increase in Germany’s total budget deficit to 4.1 per cent in 2010. The deficit was reduced to 0.8 per cent in 2011 and a budget surplus of 0.1 per cent achieved in 2012 through limited spending and higher tax revenues. In 2014, Germany had a budget surplus of 0.3 per cent and gross public debt accounting for 74.9 per cent of GDP (EU EC Data).

Germany’s GDP is expected to grow by 2.1 per cent in 2015 and 1.8 per cent in 2016 (GTAI Data) driven by domestic demand (due to low oil prices, a robust labour market and low interest rates) and growing exports (due to the depreciation of the Euro, especially against the dollar). Inflation was 0.9 per cent in 2014, and the country experienced modest deflation in early 2015. The unemployment rate was 4.9 per cent in April 2015 (OECD Data).

Policy and Legal Framework for a Green Economy

Historically Germany has played a proactive role in the environmental policy arena domestically, within the EU and at the global level. In 2002, Germany adopted its national strategy for sustainable development – “Perspectives for Germany – Our Strategy for Sustainable Development” – which promoted the concept of intergenerational responsibility for economic, ecological and socially sound development. The country’s progress towards sustainability has been monitored through periodic progress reports in 2004, 2008 and 2012 (Bundesregierung, 2002). Germany has subsequently launched several cross cross-cutting initiatives on climate change, energy and resource efficiency, linking a strong environmental protection framework with the potential benefits of cleaner, low-carbon economic growth.

In 2007 Germany adopted the Integrated Energy and Climate Programme which aims to support Germany’s efforts in reducing GHGs emissions by 40 percent by 2020 (1990 levels) and launched its Strategy for Adaptation to Climate Change in 2008. In 2010, German federal ministries of environment and economy jointly designed and implemented the Energy Concept which focuses on renewable energy and energy efficiency as tools to achieve environmentally-friendly, reliable and affordable energy supply. The Energy Concept aims to increase the share of renewable energy in electricity production to more than 80 per cent by 2050 and gradually eliminate electricity production from nuclear power plants. Supportive measures include consideration of lifecycle costs when awarding public contracts and energy performance labelling of cars and buildings (BMUB, 2011).

In 2012, Germany launched the German Resource Efficiency Programme (ProgRess) which aims to decouple economic growth from resource use, reduce the burden on the environment, support a sustainable and more competitive economy, promote stable employment and social cohesion. ProgRess identifies 20 strategic approaches and related measures concerning market incentives, information, expert knowledge, education, research and innovation, and voluntary approaches. In particular, ProgRess places emphasis on strengthening efficiency in small and medium-sized enterprises, by supporting environmental management systems, the use of resource efficient products and services in public procurement, the adoption of voluntary product labelling and certification schemes, and technology-transfer to developing countries and emerging economies (BMUB, 2015).

Fiscal Measures for a Green Economy

A programme of Ecological Tax Reform (ETR) was officially launched in Germany in1999 and implemented through several steps until 2003. Revenue neutrality was an underlying principle of the German ETR. By cutting social security contributions to the pension fund, the tax burden on labour was reduced and shifted to the use of environmental resources and fossil fuels through increased fuel taxes on transport and heating and the introduction of an electricity tax. Higher taxes on energy consumption were seen as an economic incentive to energy savings and efficiency, and thus to innovation in new technologies, while lower labour costs were seen as a tool to support employment (Schlegelmilch, 2014). It has been estimated that the ETR not only led to a decrease in CO2 emissions that would have been 2-3 per cent higher without such green taxes, but also led to a series of socio-economic co-benefits including fiscal savings from avoided imports of fossil fuels, an increase in public transport users and the creation of up to 250,000 new jobs by 2010 (Ekins, 2015; Schlegelmilch, 2014).

Excise duties on fuels (petrol and diesel) were gradually increased between 1999 and 2003 under the ETR. Although the tax rates for motor fuels have not been modified since 2003, they are still higher than the EU average rate. In 2006, Germany introduced a tax on coal consistent with the EU Energy Taxation Directive. Tax rates for heating purposes are lower than the EU average (except for kerosene, which is not extensively used in Germany) with heating for business purposes taxed at lower rates than heating for households (Eunomia & IEEP, 2015).

Currently, no overarching policy framework regulates environmental fiscal reform in Germany (OECD, 2012). Environmental tax revenue amounted to 2.18 per cent of the country’s GDP in 2012, which represents a 10 year minimum for Germany. Energy taxes account for the majority of this revenue (86.2 per cent of total environmental tax revenue in 2012, accounting for 1.76 per cent of GDP), while transport taxes (excluding fuel) amounted to 0.35 per cent of GDP, and pollution and resource taxes amounted to 0.07 per cent of GDP (OECD, 2012).

In 2009 Germany introduced an annual circulation tax for cars, which consists of a base tax (EUR 2 per 100 cm3 petrol, and EUR 9.5 per 100 cm3 diesel) and a linear carbon tax set at a rate of EUR 2 g/km. Cars below 95 g/km are exempted from the circulation tax. The ‘Lkw-Maut’, a road user charge for heavy-goods vehicles on motorways introduced in 2005, was extended to certain federal roads in 2012 and has prompted the diffusion of low-emission vehicles (OECD, 2012). Germany planned to introduce a time-dependent charge on passenger vehicles (PKW-Maut) from 2016. The main feature of this tax would be that only foreign vehicles are charged for the use of Germany’s roads as a form of relief from the above-mentioned annual circulation tax would be provided to vehicles registered in Germany (Eunomia and IEEP, 2015). However, the European Commission has recently declared that such tax design would violate the EU principle of non-discrimination, and thus blocked the introduction of the PKW-Maut.

In 2011, Germany introduced a passenger aviation tax with tax rates calibrated according to flight distances. In 2012, the aviation tax rates were slightly decreased with the inclusion of aviation in the EU Emissions Trading Scheme (Eunomia and IEEP, 2015). Moreover, the tax attracted significant criticism from industry groups, particularly as some airports recorded losing customers with passengers diverting to airports in neighbouring countries (IEEP, 2014).

A federal tax on nuclear fuels (Kernbrennstoffsteuer) is in place for 2011-2016, being applied to nuclear power stations that have had their lifetime extended. It applies a rate of €145 per gram of plutonium or uranium and generates annual revenue of about EUR 1.7 billion. The tax aims to contribute to the storage costs of nuclear waste. A waste water tax (Abwasserabgabe) applies to direct discharges to surface waters from industries and sewage treatment plants and is implemented and managed at the level of the Länder. Rates are uniform across all Länder. Revenues generated from the taxes (approximately EUR 300 million p.a.) are generally used to support projects aimed at improving water quality. A volumetric water abstraction levy is applied under the Federal Water Law with rates ranging between EUR 0.05 and EUR 0.30 per m3 across different Länder. Annual revenues from the levy amount to EUR 200-400 million and are generally used for regional compensation schemes.

Fiscal support to renewable energy was introduced in Germany through the Stromeinspeisungsgesetz (StrEG) in the early 1990s. In 2000, the Act on Granting Priority to Renewable Energy Sources (EEG) led to the implementation of an extensive programme of feed-in-tariffs (FITs) for electricity generation from renewable sources which targets hydropower, landfill gas, mine gas, sewage gas, biomass, geothermal energy, wind power and solar radiation energy. The EEG guarantees fixed FIT rates over set periods (20 years from the start of operation), with regular reviews of the FIT rates every three to four years. Plant owners (e.g., solar arrays and wind farms) have guaranteed access to the grid as grid operators are required by law to purchase renewable power (BMUB, 2000 and 2014). These measures have led to an increase in the volume of electricity produced from renewable sources from about 13.6 TWh in 2000 to roughly 160 TWh in 2014, when public support to the renewable energy sector amounted to EUR 24 billion. Although continued cost declines are making solar PV, wind, and biomass increasingly competitive with traditional sources of electricity, electricity prices have been increasing since the launch of the EEG (German electricity prices for households are the second highest in Europe – Eurostat, 2015). Through the EEG surcharge (EEG-Umlage), the costs of the EEG programme are distributed to electricity supply companies and then passed onto consumers, which has led to distributional concerns and growing public opposition.

The environment ministry produces regular reports on environmentally harmful subsidies (EHS). The latest report estimates that EHS in 2010 amounted to EUR 52 billion. According to the report, EUR 24.2 billion in EHS were provided to the transport sector, especially in the form of tax exemptions for aviation. The energy sector received EHS amounting to EUR 21.6 billion, in particular through tax reductions and exemptions for companies in the manufacturing industry and the agricultural sector which not only impact on human health and the environment but also distort competition between energy sources. The construction and housing sector received EUR 5.9 billion in EHS in the form of tax exemptions aimed at favouring the development of new industrial, commercial and transport areas (Federal Environment Agency, 2014).

Fossil Fuel Subsidy Reform

Despite Germany’s efforts to support renewable energy, natural gas, hard coal and lignite still account for around 80 per cent of the country’s energy consumption and receive significant public subsidies. According to OECD estimates, public support to petroleum, coal and natural gas in Germany amounted to almost EUR 5.08 billion in 2005 and around EUR 5.09 billion in 2011 (OECD, 2013).

Significant support is provided to energy-intensive industries (especially, steel and chemical industries) through reduced energy-tax rates. Other support measures include exemptions from energy taxes normally applied to the use of coal, natural gas, and petroleum products, which target companies using energy for processing purposes. Moreover, Germany provides tax privileges on heating oil, natural gas, and LPG to several users in the agriculture, forestry and manufacturing sectors as well as tax relief on the use of diesel fuel for agricultural purposes. In 2011, direct budgetary support to fossil fuel consumption amounted to EUR 170 million; direct budgetary support to fossil fuel production amounted to EUR 1,349 million: and fossil fuel tax expenditure amounted to EUR 21,983 million (European Commission, 2014).

Support to fossil fuel producers is also significant and above the OECD average. Relatively large endowments of crude oil, natural gas and coal has led Germany to provide 71 per cent of the total cumulative support to coal production in Europe (i.e. EU-28) in 1970-2012 (Ecofys, 2014).The most significant measure is financial assistance to the hard-coal industry, particularly those located in North Rhine-Westphalia. Germany’s public expenditure supporting coal has historically been higher than other EU countries and the cost of producing coal domestically is far higher than the price of imported coal. These large budgetary transfers have dramatically declined in recent years from EUR 4.8 billion in 1998 to EUR 1.5 million in 2014 (OECD, 2015) reflecting plans to entirely phase out coal support by 2018 in line with EU state aid guidelines. In 2007 the Federal Government and the Länder together with mines and relevant trade unions agreed on a road map for ending subsidies and scaling back coal production subject to the retirement of coal miners (OECD, 2011)

References and additional reading

Bmub (2000). Act on Granting Priority to Renewable Energy Sources (Renewable Energy Sources Act). Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety. Retrieved from: http://www.bmub.bund.de/fileadmin/bmu-import/files/pdfs/allgemein/application/pdf/res-act.pdf

Bmub (2015). German Resource Efficiency Programme (ProgRess). Programme for the sustainable use and conservation of natural resources. Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety, http://www.bmub.bund.de/fileadmin/Daten_BMU/Pools/Broschueren/progress_broschuere_en_bf.pdf

Bmub (2011). The Federal Government’s energy concept of 2010 and the transformation of the energy system of 2011. Federal Ministry for the Environment, Nature Conservation, Building and Nuclear Safety, http://www.germany.info/contentblob/3043402/Daten/3903429/BMUBMWi_Energy_Concept_DD.pdf

Bubdesregierung (2002). Perspectives for Germany – Our Strategy for Sustainable Development. http://www.bundesregierung.de/Content/EN/StatischeSeiten/Schwerpunkte/Nachhaltigkeit/Anlagen/perspektives-for-germany-langfassung.pdf;jsessionid=03707E534081545BBFD359DBDD0C066D.s1t1?__blob=publicationFile&v=1

Ecofys (2014). Subsidies and costs of EU energy – Final report. https://ec.europa.eu/energy/sites/ener/files/documents/ECOFYS%202014%20Subsidies%20and%20costs%20of%20EU%20energy_11_Nov.pdf

Ekins P., (2015). Implementing environmental fiscal reform in Europe. A presentation to the Green Budget Europe event ‘Greening the European Semester’. Brussels, DG Environment January 28, 2015. http://ec.europa.eu/environment/integration/green_semester/pdf/29_01_2015/side per cent20event.pdf

Eunomia and IEEP (2015). Study on Environmental Fiscal Reform Potential in 14 EU Member States: Main Report. Study on No 07.0201/2014/685390/ENV.D.2. Final Report to DG Environment of the European Commission. http://www.ieep.eu/assets/1722/Eunomia_EFR_Final_Report_MAIN_REPORT_V0.1.pdf

Eurostat (2015). Eurostat News Release 92/2015 – 27 May 2015. http://ec.europa.eu/eurostat/documents/2995521/6849826/8-27052015-AP-EN.pdf/4f9f295f-bb31-4962-a7a9-b6c4365a5deb

European Commission (2014). Enhancing comparability of data on estimated budgetary support and tax expenditures for fossil fuels – Final Report. http://ec.europa.eu/environment/enveco/taxation/pdf/201412ffs_final_report.pdf

Federal Environment Agency. Technical Brochure – Environmentally Harmful Subsidies In Germany. Updated Edition 2014. https://www.umweltbundesamt.de/sites/default/files/medien/376/publikationen/environmentally_harmful_subsidies_in_germany_2014.pdf

IEEP (2014). Environmental Tax Reform in Europe: Opportunities for The Future. Annexes to Final Report. Institute for European Environmental Policy. http://www.ieep.eu/assets/1398/ETR_in_Europe_-_Annex_2_3_4.pdf

OECD (2014). “Better Policies” Series – Germany. Keeping The Edge: Competitiveness For Inclusive Growth. Organisation for Economic Co-operation and Development. http://www.oecd.org/germany/Better-policies-germany.pdf

OECD (2011). Inventory of estimated budgetary support and tax expenditures for fossil fuels. Organisation for Economic Co-operation and Development. http://www.oecd.org/site/tadffss/48805150.pdf

OECD (2012). OECD Environmental Performance Reviews – Germany 2012. Organisation for Economic Co-operation and Development. http://www.oecd-ilibrary.org/docserver/download/9712031e.pdf?expires=1446815914&id=id&accname=ocid195767&checksum=C2DC85D348C4EC9F366820B0B3C8C483

Schlegelmilch K., (2014). How an Environmental Fiscal Reform Can Contribute to a Green Economy with Jobs, Welfare and a Clean Environment? Policy Lessons Learnt in Europe and Beyond. Cyprus Economic Policy Review, Vol. 8, No. 2, pp. 125-133 (2014) 1450-4561. https://www.ucy.ac.cy/erc/documents/Schlegelmilch_125-133.pdf

http://europa.eu/rapid/press-release_IP-15-5200_en.htm