We assess the design of the recent environmental tax reform in Germany. Based on fundamental welfare economics we argue that extensive tax reductions and rebates in favour of energy-intensive industries, as provided by the tax reform, substantially water down its cost-effectiveness. The environmental tax reform essentially boils down to a fiscally motivated fuel tax. From a political economy perspective the exemptions can be explained by voters' low willingness-to-pay for the environment and the sectoral concentration of adjustment costs. With respect to green voters, however, the government does not admit that the environmental objective has effectively been abandoned. We conclude that an honest policy should either give up the environmental tax reform frankly or implement it without exemptions.
Böhringer, Christoph and Robert Schwager (2002), Die Ökologische Steuerreform in Deutschland - ein umweltpolitisches Feigenblatt, ZEW Discussion Paper No. 02-14, Mannheim. Download