German Tax Reform For 'Green Growth' Encouraged
A new report from the OECD makes numerous recommendations to German decision makers on energy tax reform measures, to limit the amount of carbon, energy and resources Germany uses to grow its economy.
On policies introduced to-date, the OECD commended the stringent environmental requirements now in place, which have caused Germany to become a leader in the environmental goods and services sector. The sector is expected to be worth up to EUR300bn (USD375bn) by 2020 and become an increasingly important source of economic growth and jobs for Germany.
In launching the report on future measures, the OECD's Environment Director, Simon Upton said: “New sources of green growth can play an important part in the recovery from the current economic and financial crisis. In this, Germany is leading the way.”
The report notes that German environmental tax policy dates back to 1999-2003, and could be updated to improve the regime's efficacy. The reform introduced a tax on electricity consumption and gradually increased the excise duties on fossil fuels. Revenues collected have contributed to a reduction in social security contributions, while providing incentives for companies to reduce their carbon footprint.
Estimates indicate that this mechanism has helped reduce energy consumption and greenhouse gas emissions, while having positive employment and economic effects. The OECD points to a number of design features which have, however, reduced the effectiveness of these reforms:
The report says that Germany should ensure that taxes are consistent with the environmental externalities of fuel use. The report notes that in most countries, diesel is taxed at a lower rate than petrol, despite its higher carbon content and the higher levels of local air pollutants it generates. Energy taxation and the EU ETS should be better combined to provide an effective and consistent carbon price signal across the economy, so as to avoid gaps and double regulation between the ETS and non-ETS sectors, the report says.
The report also suggests that Germany's tax regime in respect of vehicles is ineffectively designed. The report says that a patchwork of conflicting economic measures apply to vehicles, and recommends that taxation should be revised to provide a more coherent set of incentives for vehicle owners to purchase and use more environmentally-friendly models.
The report says that Germany's comparatively low tax burden on the purchase of cars provides a relatively weak incentive at present, for the purchase of low-emission vehicles. Furthermore, the OECD has said that the tax treatment of company cars undermines the nation's vehicle tax policies. The report did however commend German policies on heavy goods vehicles, which through the application of emission-based highway tolls, has helped increase the uptake of low-emission freight vehicles. This should be extended to light duty vehicles and passenger cars, the report recommends, to provide similar environmental benefits.
Lastly, the report says that subsidies in place that counteract the impact of energy taxes are significant, amounting to 1.9% of gross domestic product in 2008, representing a considerable loss of revenue for the public budget. The report notes that progress has been made in reducing direct subsidies to coal production and other tax breaks, but warned that remaining support measures may run counter to national climate policy objectives.
The report recommends that Germany should consider establishing a mechanism to systematically screen existing and proposed subsidies against their potential environmental impact, with the goal of phasing out environmentally harmful and inefficient subsidies. Extending the use of market-based instruments, including green taxes, and reforming environmentally harmful subsidies could make the tax system more growth-friendly, would contribute to maintaining a balanced budget, and would help achieve environmental goals more cost-effectively, the report concludes.