Germany Looks to Revamp Billions in Tax Subsidies for Polluters

Germany faces clawing back 55 billion euros ($61 billion) in tax breaks aiding its biggest polluting industries, in a move to cut greenhouse emissions by 2030—but this could hurt its own companies.

Environmental tax breaks are targeted at the transport, industrial, agricultural, and manufacturing industries. Those sectors in 2018 together account for more than 60% of the country’s gross value added, an indicator of economic contribution, according to data from the Federal Statistics Agency.

And as lawmakers are increasingly divided over the task of dismantling incentives that subsidize heavily-polluting industries, the cloud of a pending recession hangs in the air. Germany is expected to dip into a technical recession this year after the economy contracted 0.1% contraction in the second quarter of the year.

Chancellor Angela Merkel wants to move on the matter. Her so-called “climate cabinet” is scrambling to pull together a climate law by Sept. 20—days ahead of a U.N. climate summit in New York—with lawmakers torn between using a national tax or an extension of the EU’s emissions trading system to price carbon.

And they have to pick their way through the mire of tax breaks, incentives, and subsidies that have allowed industrial giants like BASF SE, agricultural firms, and airliners like Deutsche Lufthansa AG to escape full levies on kerosene, diesel and other energy sources.

One of the largest tax breaks—2.7 billion euros in exemptions from electricity taxes—goes to manufacturers, agricultural firms and foresters, according to a report from the Federal Ministry of Finance. Electricity producers separately received 1.7 billion euros in tax breaks, according to the report, while airliners received an estimated 570 million euros in exemptions on fuel tax in 2018.

Other controversial subsidies include a reduced tax rate for diesel fuel compared to gasoline, tax exemptions for diesel used in agriculture and billions in subsidies and aid for coal miners and users that are being phased out as part of Germany’s plan to stop using coal by 2038.

Industry associations warn that scrapping the tax breaks would force core German industries to absorb higher energy prices as they also struggle with falling exports, trade tensions, and potential Brexit fallout.

The U.K. leaving the EU without a proper trade deal would “cost the German economy around 1% of GDP and potentially 200,000 jobs in Germany and the U.K.,” according to Alex Altmann, partner at London-based Blick Rothenberg, who is also a Co-Chairman of the British Chamber of Commerce in Germany.

Environmental groups and Green Party politicians are resolute—they want the system dismantled altogether, arguing that the tax breaks are endangering Germany’s climate goals—which call for a 55% cut in greenhouse gas emissions by 2030—and encourage companies to consume more fossil fuels.

“We are in the middle of the climate crisis and the federal government supports exactly those who continue to fuel this crisis,” Stefan Schmidt, a member of the German Bundestag for Alliance 90/The Greens, told Bloomberg Tax.

“If the federal government is serious about its concern for our climate and if we want to achieve our climate goals, it has to fundamentally rethink its subsidy policy and finally start to use taxes to lead the way,” Schmidt said.

Controversial Benefits

Many of the exemptions and subsidies from Germany’s environmental and energy taxes are intended to keep companies from relocating to countries with cheaper electricity costs, a concept known as “carbon leakage,” said Florian Zerzawy, a scientific officer in energy policy at Green Budget Germany.

“From the beginning there were exemptions for energy-intensive industries, because the fear was that energy-intensive industries would shift production to other countries,” said Zerzawy.

Industrial giants BASF SE and Thyssenkrupp AG both benefit from exemptions from an energy levy known as the EEG, or “Erneuerbare-Energien-Gesetz,” surcharge that is offered to manufacturing firms and other companies with very high levels of electricity consumption.

A spokesman for BASF estimated that the company would “have to shoulder a financial burden of several hundred million euros per year” if its main production site in Ludwigshafen had to pay the full levy.

Thyssenkrupp, an industrial conglomerate that makes everything from elevators to mining equipment, said: “Under the current regime, EEG tax exemptions on self-produced electricity are very important for thyssenkrupp to avoid competitive disadvantages.”

The subsidies are “simply contradictory,” according to Claus-Friedrich Laaser, an economist at the Kiel Institute for the World Economy.

“You want to tax the users of energy and make incentives for better use of energy, but on the other hand, those who are consuming the most energy are exempted from it,” he said.

The German Association of the Automotive Industry and the national Farmers’ Association didn’t respond to requests for comment.

In all, the country offers roughly 55 billion euros in subsidies deemed harmful to the environment, according to an April report from the Federal Agency for Nature Conservation.

Germany has made multiple pledges—both to the G7 and the EU—to phase out subsidies for fossil fuels. But progress has been slow: in a July response to questions from a Bundestag member about subsidies, the federal government named just one environmentally-harmful subsidy that it has phased out, a tax break for natural gas and liquefied petroleum gas. It is evaluating 13 other energy taxes and “will examine the extent to which the results require further action.”

Germany isn’t alone in its continued support for fossil fuels. A May report from the International Monetary Fund estimated fossil subsidies in 2017 at $5.2 trillion globally.

No Silver Bullet

There’s deep division among Germany’s political leaders about how to reform the patchwork of subsidies and tax exemptions, with fears over the potential harm to some of Germany’s largest companies clashing with the potential for environmental damage.

And for now, lawmakers remain focused on forming a plan to price carbon emissions ahead of Merkel’s Sept. 20 deadline. Her Christian Democrats/Christian Social Union parliamentary group favors extending emissions trading to the heating and transport sectors, while its coalition partner, the Social Democrats, wants a tax on pollution.

The CDU/CSU parliamentary group also wants to create new incentives to encourage the use of cleaner fuels and greener cars. And it wants to encourage energy-saving building renovations, instead of removing subsidies.

Lukas Köhler, a Bundestag member with the Free Democrats, said his party would like to see a reform of Germany’s environmental taxes. But he’s against eliminating subsidies and incentives that have helped support German industry, such as the electricity tax exemptions for manufacturers.

“If energy prices go too high, they will just leave the country” said Köhler. “There’s a huge requirement for a good and functioning industry, not just for the GDP but because we see that the economy is a key player when it comes to climate change.”

Still, he said, “CO2 pricing is not the silver bullet, we will not reach our emission reduction goals only with a CO2 pricing. In addition to broadening the emissions trading system, we have to reform the complete system of taxes.”

At least one proposal has garnered broad political support—removing the airline sector’s exemption from taxes on kerosene fuel or raising the aviation tax. Members of the CDU/CSU group, the Social Democrats and the Greens all support the measure. Growth in air travel, spurred by cheap tickets, has helped drive emissions from the aviation industry, up by roughly 70% globally since 2005, according to the International Civil Aviation Organization.

The German airline industry has fought back. The German Aviation Association said the tax would be “counterproductive.” In a statement to Bloomberg Tax, Germany’s Lufthansa cautioned: “An additional national kerosene tax over and above the aviation tax would only lead to a shift in traffic flows and could even result in a higher overall environmental impact.”

Merkel’s climate cabinet is expected to vote on its climate proposal Sept. 20, after which the proposal must be approved by Germany’s cabinet of federal ministers. It will then move to German Parliament, where an overhaul of environmental taxes and subsidies is likely to be a subject of debate.

“We must not wait any longer,” said Schmidt of the Greens. “The time to react to the climate crisis is too short already anyway.”