Low gas prices as opportunity for environmental taxation

Germany’s eco-tax was successful, but it has not been updated for 12 years. Environmental economists met in Berlin in September to discuss “ecological basic income.” Craig Morris reports.

Gas station nozzle

Tax the bads, not the goods. (Photo by REK / pixelio.de)


Regular readers of this blog will be familiar with Green Budget Germany (GBG), the organization behind some excellent studies on subsidies for conventional energy and industry electricity prices. The think tank was also behind Germany’s eco-tax, which was rolled out in annual increments from 1999-2003.

Eco Tax Reform

Read more on the eco tax reform in our chapter on Environmental taxation.

The problem is that “the effect of the eco-tax is shrinking,” as Thomas Holzmann, vice president of the German Environmental Agency (UBA) stated at the meeting. Inflation is eating away at the tax, which is a flat fee charged per energy unit. By incentivizing lower fossil fuel consumption, the tax therefore gradually does away with itself if it is successful. For instance, after peaking at 18.7 billion euros in 2003, revenue from the eco-tax has fallen to just above 17 billion euros in previous years (source in German) – in absolute numbers, not adjusted for inflation.

Klusmann, the new executive director of Green Budget Germany, therefore proposed that the eco-tax be indexed. Still, the higher tax will be a hard sell. Michael Kopatz of the Wuppertal Institute compared the eco-tax to “a diet”; GBG board chairman Anselm Görres, to “medicine.” Yet, the whole idea of environmental taxes is not to increase the level of taxation, but to focus the existing level on discouraging environmentally damaging consumption. Unfortunately, it is hard to explain this distinction to the public when increasing one tax.

The experts are therefore focusing on emphasizing what is done with the revenue instead of where the revenue comes from. The existing eco-tax is largely used to reduce payroll taxes. In the late 90s, globalization (remember that debate?) was the big issue for the German economy. German workers were relatively expensive. Lowering payroll taxes was a way of making Germany more internationally competitive. And the purpose of environmental taxation is to move taxes towards bad things and away from good things like labor.

But that approach does not reach everyone. Freelancers, for instance, do not benefit to the same extent. The general consensus at the meeting was therefore that the revenue should simply be returned to everyone on a per capita basis as basic income. The magic of this approach is that everyone sees the money coming back to them. They can do what they want with it, including buy more gas – but that gasoline will be more expensive. The approach even has a redistribution effect; those who can afford to drive gas-guzzling SUVs will be cross-subsidizing poor households who can’t afford a car.

Reinhard Loske, the leading politician behind the eco-tax of 1999, agreed that basic income would reach more of the population than payroll tax offsets. In his presentation, energy analyst Ulrich Sachschneider proposed that the group call for “ecological basic income” instead of a higher eco-tax in order to make the benefits of the proposal clear to the public. If the current roughly 17 billion euros were handed out annually on a per capita basis, you could cut a check for nearly 1,000 euros for a household of four – almost enough to cover their entire electricity bill for the year.

Another beautiful thing about the idea is that it can grow. If the policy proves popular, raise the amount, and the level of basic income also rises. Theoretically, the policy could even be designed from the other way around; pick the level of basic income you want, and spread the charges across the environmentally unfriendly behavior you wish to discourage. “Technology alone without sufficiency will probably not work,” Professor Felix Ekardt explained the need for behavioral change in his presentation.

Nonetheless, the experts agreed with German economist Claudia Kemfert that no single policy mechanism will suffice alone. Görres concurred: “the only realistic strategy is a combination of complementary policies.” The question is therefore how big “ecological basic income” could be. Total environmental taxation made up 8.9 percent of all tax revenue in 2014. There is a lot of space to increase that level. But even if everyone starts receiving basic income, at some point higher energy prices will lead to opposition. The devil is in the detail. We look forward to seeing specific proposals.

Craig Morris (@PPchef) is the lead author of German Energy Transition. He directs Petite Planète and writes every workday for Renewables International.

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Craig Morris

Craig Morris (@PPchef) is the lead author of Global Energy Transition. He is co-author of Energy Democracy, the first history of Germany’s Energiewende, and is currently Senior Fellow at the IASS.

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