Ecological Tax Reform


In the context of the coalition talks between the Social Democratic Party of Germany and Alliance‘90/The Greens, the implementation of an ecological tax reform was agreed upon. Concrete information concerning the taxation procedure, the determination of the assessment basis and exemptions provided has not been given. However, the tax rates and the tax relief provided regarding social security contributions were specified in numbers:

Electricity:2 pfennigs per kilowatt hour

Heating oil: 4 pfennigs per litre

Gas: 0.32 pfennigs per kilowatt hour

Petrol and diesel: 6 pfennigs per litre

Reduction of social security contributions by 0.8 percentage points

(Assumption: equal shares of unemployment insurance contribution and pension insurance contribution)

The impact of the eco-tax and its compensation through a reduction of social security contributions on an average business in the manufacturing industry has been calculated at the Centre for European Economic Research (ZEW) in collaboration with Prof. Jacobs (University of Mannheim) using the “European Tax Analyzer” software programme. Within this simulation, tax systems are displayed in such a detailed way that impending changes in tax payments for the model company can be quantified exactly. The microeconomic analysis shows that the tax burden for the company will increase by 1.3 per cent, since the compensation is much lower than the eco-tax burden (see Table 1).

As a result of the reform, the effective tax burden on the company will increase by 1.4 per cent to 55.1 per cent. The tax burden on the company is thus higher than on a comparable company in Great Britain (24.3 %), the Netherlands (38.9 %) or the USA (34.5 %), but lower than in France (94.3 %). The underlying assumption is that there are no adjustment responses on the part of the company, which appears to be rather realistic in view of the short-term implementation for 1999. On a long-term basis, however, microeconomic as well as macroeconomic changes are expected to take place, which may either reduce or further aggravate the burdening effects on companies of the reform measures.

Eco-tax  Compensation Total Short-term Impact
+1,8% -0,5% +1,3%

Table 1: Consequences of the proposed eco-tax reform for the tax burden on an average business in Germany in 1999.

A detailed look at individual companies from different sectors shows that this reform concept will produce winners as well as losers. Depending on each case, the (dis-)burdening consequences in terms of tax payment range from a reduction of the tax burden by 0.7 per cent to an increase by 17.5 per cent (see Table 2). Special derogations for energy-intensive companies were not taken into account in order to demonstrate the basic effects of the eco-tax reform.

The analysis shows that the company engaging in mechanical engineering as well as the service sector company tends to benefit from the tax reform. The remaining eight companies on the other hand are among the losers of such an eco-tax reform. Taken as a whole, the tax relief as a compensation of the energy tax burden appears to be too slight in the present reform draft, with the result that the majority of the examined companies as well as the exemplified average business would experience an increase in the overall tax burden. Despite the overall rather moderate energy tax rates of this concept, individual companies will have to cope with significant additional burdens, resulting in a reduction in the international competitiveness of these companies and in Germany being less attractive as a business location in these sectors.

Owing to the already high tax burden on German businesses on an international comparison, job losses are to be feared in the losing sectors. It remains to be seen, whether these losses can be compensated for by job creations on the side of the winning sectors. However, transitional difficulties, posing an additional risk to the labour market, are to be expected, since a shift of workforces may not necessarily be easy due to differences in qualifications and requirement profiles.

Derogations for energy-intensive businesses seem to be appropriate in this context. In the case of businesses with the highest energy consumption, however, an exemption of the eco-tax significantly reduces the environmental incentive effect of this reform, since the main target of an ecological tax is to enhance environmental protection. It can, however, be questioned whether energy consumption can be reduced at all given the low tax rates and exemptions for energy-intensive businesses, as intended in the concept. In any case, it is not feasible to reduce energy consumption to the extent necessary to protect the environment. In addition, if coal is exempted from taxation, even though its burning produces the highest carbon dioxide emissions of all fossil fuels, a marked improvement in environmental protection is not to be expected.

The question therefore is whether the concept behind such an ecological tax reform is merely to open up an additional source of funds for government expenditure. Theoretically, the implementation of an ecological tax reform is indeed is to be welcomed from an economic point of view. The evaluation of such a tax reform, however, essentially depends on its concrete structure and its corresponding compensation. The enhancement of environmental protection should be central to these efforts. Nevertheless, this target is all the more difficult to achieve when pursued unilaterally by one country without having to suffer from a reduction in the international competitiveness and its subsequent negative effects on employment.

Automobile AG (joint stock company)


Automotive Component Supplier GmbH (company with limited liability)


Building AG


Electronics GmbH


Trading GmbH


Mechanical Engineering GmbH


Food AG


Lubricant GmbH




Cement Gypsum AG


Table 2: Consequences of the proposed eco-tax reform for the tax burden on selected companies in the federal state of Baden-Württemberg in 1999. (Data basis: 1995 financial statements). For reasons of data protection, the company names are made anonymous with merely their sector affiliation being recognisable.


Dr. Alexander Wünsche, E-mail: