Carbon tax policy in Germany

The subject of heating debates appeared in 1999 when the German Ecological Tax Reform was adopted and implemented. On the one hand, the abovementioned project showed itself to be an efficient instrument which assists in reducing greenhouse gas emissions. Moreover, the adopted law became an incentive to the employment, creating new working places and providing for the implementation of various innovations. On the other hand, the German Ecological Tax Reform has been subject to criticism since its implementation as the law has various alleged influences and impacts on the economy of the country.

Ecological tax reform in Germany background

The German ecological tax reform was adopted in 1999. After that, the ecological law of the country was amended twice-in 2000 and in 2003. First of all, the law provided rung-by-rung growth of the taxes on fuel and fossil fuels and laid the foundation for the tax for energy. Ecological taxation is mostly applied to those enterprises which deal with a great amount of fossil fuels and in this way increase the amount of greenhouse gas emissions. Secondly, the reform and the implemented tax are revenue neutral, which means that the tax compensates revenues in the other branches of industry.


So during the period of 1999-2003 the law experienced a step-by-step implementation with various adoptions by the governing coalition of the Social Democrats and the Green Party. The German ecological tax reform was applied to the numerous amounts of fuel types-from gasoline and diesel for vehicles to oil and gas used for heating and fossil fuels like natural gas, coal and oil used for electricity generation.

Design, use and derogations of the Ecological Tax Reform

Since the 80s of the previous century there have been lively debates over the idea and the concept of an ecological tax reform in Germany. The very notion of ecological tax reform was created by Binswanger, the economist from Switzerland. The idea of the concept is to reorganize and reshape the very system of taxes in a way so that two goals were pursued: in the first stage of the restructuring, the main aim is to charge taxes mainly on those kinds of activities that somehow pose a threat and bring damage to the environment. This step should give a spur and an economic impetus to the prevention and reduction of environmental contamination. The second purpose of the economic tax reform is to remove the main obstacles which stand in the way of the growth in the employment figures. This can be achieved by using these new tax revenues instead of the charges and taxes which exist at the moment, that is, by replacing them, especially so called non-wage labour costs. Thus, instead of labour, energy consuming and environmental pollution take the entire burden of taxes. This fact encourages the kind of behavior and treatment that are more environmentally friendly and tend to save energy. At the same time, more open job positions are created.

The results of the economic tax reform in Germany since its implementation in April 1999 are as follows: there was a significant increase in tax rates on gas, heating oil and mineral oil used as fuel between 1999 and 2003-by 3,07 Cent per litre each year; besides, in 1999 both electricity and energy taxes were introduced. It should also be noted that fuels such as brown coal and hard coal are not liable to the ecological tax reform and energy tax.

The employment sector also had large benefits due to the implementation of the ecological tax reform: the tax revenue in the amount of nearly 18, 7 billion Euro, which went into the scheme of public pension, reduced non-wage labour costs as well as contribution rates-from 20,3% in 1998 to 19,5% in 2005.

Carbon tax policy

However, since 1999 the ecological tax reform has witnessed several derogations due to certain economic and social factors. These special regulations and amendments mainly touch upon agriculture and the sector of manufacturing. For instance, in industry and agriculture, the reduced tax rate increased from 20 per cent of the regular tax rate up to 60 per cent in 2003. Besides, certain derogations such as e.g. the exemption of combined heat and power plants and gas-steam power plants from the mineral oil tax and the ecological tax were made for the purpose of promoting the development and creating of particular technologies on the market which would be friendly to the environment and help to save energy.

The effects of Germany's Ecological Tax Reform

One of the main ideas of The German ecological tax reform was to create an additional state income to make financial contributions to the pension scheme of Germany. That was to be achieved through lowering the amount of expenditures in the field of non-wage labour costs. Thus, the increase of the prices for energy is supposed to become an impetus for energy savings and energy efficient policies, and the reduction of the non-wage labour costs should increase the number of working places.

Public polls showed that a lot of citizens of Germany have scant awareness concerning how the increase of prices for energy and the work cost reduction are linked by the Germany's Ecological Tax. That is the main reason for the negative reaction to the law from the population.


On the whole, the rates show that the reform brought more positive consequences than the negative ones. According to the results, it is clear that the ecological tax reform succeeded in achieving its two key aims. It simultaneously improved the situation with greenhouse gas emissions and tackled the employment issues as well. The tax implementation also made a significant contribution to the state GDP growth rate.

Summary and outlook on the Ecological tax reform

It is clear that ecological tax reform, which was introduced in 1999, had a positive influence on climate change protection and the creation of workplaces. The law also made contribution to the promotion of the development and the market popularity of energy-saving technological innovations and the usage of renewable sources of energy. Due to the eco-tax, the emissions of greenhouse gas have perpetually decreased. Only in 2003, after the law's gradual implementation, the amount of emissions reduced by 2,4%, which is 20 million tons of CO2. Thus, the eco-tax is one of the most powerful instruments for climate protection in Germany. The number of workplaces rose by 250.000 jobs in 2003, mostly in sectors with intensive labour and in the sector of energy-saving technologies production.

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