Environmental Tax Reform 1999-2003

The German Ecotax

On April 1, 1999 the German government introduced an ecological tax reform (ETR) that increased the price of energy. Here you can find some brief information about why the "ecotax" (Ökosteuer) was introduced, how it works, and what its impact has been.

The Environment
Industrialised countries are using more natural resources than our planet can provide in the long run. Fossil fuels are scarce and limited. At the same time the emissions of greenhouse gases (e.g. CO2) from the burning of coal, natural gas, and other fuels are increasing.
Þ A change in use of fossil energy is necessary.

Labour in Germany is relatively expensive due to high non-wage labour costs, in particular social insurance contributions. This has a negative impact on Germany's competitiveness and contributes to the relatively high rate of unemployment.
Þ Stop the increase in non-wage labour costs.

An Ecological Tax Reform will tackle these two problems at once.

The Ecotax as Part of an Ecological and Economic Tax Reform
The tax burden on the labour costs is lowered and shifted to tax the consumption of environmental resources.
Higher taxes on energy consumption provide economic incentives to save energy and use it more efficiently, thus leading to more innovation in new technologies.
The tax revenue is returned to tax payers by using the money to lower pension contributions. By lowering non-wage labour costs, the labour factor becomes cheaper, and existing jobs can be saved, while new jobs are created (especially in the renewable energy sector).

Here you can have a look at the whole process once again:

The German Ecotax in more detail

The 5 Steps of the German Ecotax
The Ecotax was introduced on April 1, 1999 based on the "Act on the Introduction of the Ecological Tax Reform". The mineral oil tax and the electricity tax were successively increased every year until 2003.



Some exemptions:
To prevent German industry from competitive disadvantages and for ecological and social reasons there are some exemptions. Here are the most important:

The Ecological Tax Reform is almost revenue-neutral
The largest share of revenues has gradually reduced and stabilised employer and employee pension deductions from 20.3% in 1998 to 19.5% in 2003. Without the ecotax, these contributions would have been 21.3% in 2003.

The Effects

The ETR provides incentives to:

Which in turn leads to:

Furthermore, the ecotax continues to contribute to Germany's achievement of its Kyoto goals of reducing CO2 emissions by 25% in 2005 as compared to 1990 levels.

Perhaps the most important effect of the German ecotax is the reduction of pension contributions (see above).
The German ETR gives rise to a double dividend in terms of increased employment and decreasing CO2 emissions.