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As its name indicates, the Law Taking Initial Steps Towards Ecological Tax Reform (Gesetz zum Einstieg in die oekologische Steuerreform) involves more than just an increase in existing excise taxes on energy and, as regards electricity, the introduction of a new one. In the eyes of its proponents, this legislation is the act by which Germany embarks upon an ambitious program of "ecological taxation".

According to estimates released by the Federal Ministry of Finance in March 1999, the measures which went into effect on 1 April 1999 are supposed to generate revenue of around EURO 5.78 billion (about US-$ 6.18 billion) by the end of the year. This will be used to reduce the statutory pension insurance contribution (social security contribution) from 20.3 % of wages to 19.5 %. Revenue from the new taxes will also finance a program for the promotion of alternative sources of energy. Two further energy tax increases are planned, each of similar proportions, which would put total annual energy tax revenue at around EURO 17.33 billion (about US-$ 18.50 billion).

The use of general tax revenue to finance social benefits previously paid for out of employer and employee contributions is in itself noteworthy.

1. Ecological taxation: basic concept and goals

The Coalition Agreement signed in October 1998 between the Social Democrats and the Greens, the parties currently in office, describes ecological tax reform as a series of scheduled and therefore calculable increases in the taxation of energy consumption to create market incentives for technologically advanced energy-saving products and for energy-conscious consumer behaviour. The proceeds of the "ecological" taxes are earmarked almost entirely for return to taxpayers in the form of reductions in Germany's high social charges, which are borne half each by employer and employee. In theory at least, the new taxes thus do not increase the overall net tax burden. Rather, they shift part of this burden from employers and employees to energy users.

Almost all members of a society are direct consumers of energy, either for business purposes in factories and in office buildings or for personal purposes in private households, as users of public and private means of transportation, and as purchasers of products, the manufacture of which requires the expenditure of energy. Energy taxes are therefore borne by all, though not to an equal degree. The social charges which they replace were, however, borne only by employers and employees, a decidedly smaller set or persons. It is hoped that, by reducing the direct cost of labour, energy taxes will contribute to reduction of the unemployment rate.

Successive pre-announced increases in energy taxes over time are an important aspect of ecological taxation. It is hoped that industry and consumers will change their behaviour so as to use significantly less energy, thus enabling the current government to meet its goal of reducing CO2 emissions by 25 % compared with consumption in 1990 by the year 2005.

Predictable increases in energy taxes are intended to allow industry to plan and implement measures to reduce its energy consumption and therefore its tax bill. To the extent that capital spending for energy reduction is cheaper than paying the incremental tax falling on avoidable energy consumption, businesses are supposed to maximise their after tax profits by reducing their energy use and hence energy taxes. On the other hand, steadily increasing energy tax rates are also supposed to prevent erosion of the energy tax base and make the tax a reliable source of revenue.

The taxes are structured to fall essentially on nuclear energy and fossil fuels and hence favour the development of renewable sources of energy. There are also tax breaks for public transportation.

It is also hoped that increased costs of energy will provide impetus for the development of new energy-saving technologies and products, thereby giving Germany a competitive advantage in an area which proponents of the taxes hope will attain worldwide economic importance in the 21st century, e.g. because of global warming or other deleterious ecological consequences of energy generation.

2. Doubts surrounding ecological taxation

Many doubts surround "ecological" energy taxation. From the point of view of tax theory, it remains to be seen whether a tax which taxpayers are supposed to avoid (by reducing their energy consumption) can be made a reliable source of revenue. An even bigger question mark is the feasibility of such a tax on a national or even an EU scale in a world of global competition. Because of these considerations, the proportions of the new energy taxes are modest, so much so that nobody expects them to have much ecological impact in and of themselves. Numerous exceptions for manufacturing industries contained in the initial measures also cast doubt on the efficacy of the taxes as a whole, and it is anything but clear whether the complicated new electricity tax in particular is administrable as a practical matter.

Two further energy price increases are contemplated for the next three years to reduce social charges by another 1.6 percentage points. According to the Coalition Agreement, details should be announced around the middle of 1999. It is, however, unclear whether the current administration views further ecological taxes as contingent upon some measure of EU harmonisation of taxes on energy and, if so, whether this can be achieved.

3. Overview of the energy tax increases

In general, the following tax increases took effect on 1 April 1999) (EURO 1 = US-$ 1.07):

Energy source

Taxation in Germany

Tax Increase






Petrol (gasoline)




per litre

Light heating oil




per litre

Natural gas (for heating)




per kwh

Electric current




per kwh

The tax increase for petrol also applies to diesel, natural gas, and liquid gas used to power vehicles. The increase for light heating oil also applies to liquid gas used to generate heat. The increase for natural gas used for heating (and cooking) also applies to light oils and medium-weight oils used to produce gas for such purposes.

The tax on electricity constitutes a completely new excise tax governed by the newly legislated Electric Current Tax Law (Stromsteuergesetz).

Otherwise, the new legislation merely increases existing excise taxes. The magnitude of these increases compared with the previously existing excise taxes varies greatly depending on the particular fuel involved. While the excise tax on lead-free petrol has risen by a modest 6 % (from DM 0.98 per litre to DM 1.04 per litre), that on light heating oil has jumped by 50 % (from DM 0.08 per litre to DM 0.12 per litre).

The new law makes no changes as regards aeroplane fuel (kerosene), which is, as before, not subject to excise tax.

4. Details of the tax on electric current

4.1 Accrual and payment of the tax

The tax on electric current accrues when electricity is withdrawn from the electricity network by a final consumer, self-generator, or supplier of electricity. The tax also accrues when electric current is withdrawn illegally.

The person liable for the tax is the supplier or, where electricity is used by the person who generated it, the generator (so-called "self-generator").

The following persons are required to have a license:

  • German resident suppliers of electric current desiring to supply electricity to final consumers located in Germany;
  • self-generators of electric current desiring to use electricity for their own purposes; and
  • final consumers of electricity desiring to purchase electricity from sources outside of Germany.

Licenses are issued by the Main Customs Offices (Hauptzollaemter) upon request by persons who have a proper commercial accounting system, prepare annual financial statements, and may be relied on to remit the tax. If compliance appears doubtful, a pre-payment equivalent to two months' estimated tax liability may be required. The license is deemed to have been issued for the period through 31 December 1999.

There are presently indications that the tax authorities may have underestimated the number of final consumers purchasing electricity from foreign (particularly Swiss) sources, which may lead to modifications in this area.

Furthermore, the determination whether electricity is purchased from foreign sources will probably be made with respect to the seller's location, not the point of generation and path of transmission of the electric current as a factual matter (invoice path, not energy transmission path). This may have anomalous consequences when German electricity is purchased by German consumers through, for instance, the Amsterdam electricity exchange.

The persons liable for the tax must file returns on a monthly or an annual basis in which they themselves calculate the tax owing and remit it with the return. Those electing annual filing must pay monthly prepayments assessed by the Main Customs Office.

Tax on electricity received by a final consumer from sources outside of Germany accrues when the final consumer withdraws the current from the electricity network. The final consumer is himself liable for the tax. Details concerning tax collection from such final consumers are not yet available.

4.2 Tax rate and exemptions

The tax rate is DM 0.02 per kilowatt hour or DM 20.00 per megawatt hour (EURO 10.23 = US-$ 10.94 per megawatt hour).

Electric current is exempt from tax in the following cases:

1. If it is generated using renewable sources of energy and is withdrawn from the electricity network by

  • self-generators for their own final consumption or
  • final consumers from an electricity network or line carrying electricity generated using only renewable sources of energy.


2. If it is withdrawn from the network by a final consumer for the purpose of generating electric energy.

Electricity is considered generated using renewable sources of energy if generated exclusively using hydraulic, aeolian, solar, or geothermal power or by means of waste dump gas, purification treatment gas, or bio-mass. Electricity generated using hydraulic power, waste dump gas, purification treatment gas, or bio-mass is, however, no longer deemed to come from renewable sources of energy if the installed generator capacity of such facilities exceeds 5 megawatts.

The exemption for electricity generated using renewable sources of energy may remain a theoretical matter as long as there are no electricity networks or lines carrying electricity generated using only renewable sources of energy, which presently appears to be the case.

To qualify for the exemption, the final consumer must have authorisation from the Main Customs Office. This is not deemed to have been automatically issued for the period through the end of 1999 and must accordingly be applied for immediately. The tax authorities will, however, apparently issue such licenses retroactive to 1 April 1999 if the licensee so requests in its application.

4.3 Reduced tax rates

There are two reduced tax rates of DM 10.00 and DM 4.00 per megawatt hour.

Rate of DM 10.00 per mwhr

This rate applies in the following cases:

1. For the operation of electric overnight energy storage heaters (Nachtspeicheroefen), installed prior to 1 April 1999; and

2. For mountain railways and rail transport traffic, excluding traffic inside private plant grounds, and for bus traffic using electric overhead lines.

Rate of DM 4.00 per mwhr

The reduced rate of DM 4.00 per mwhr applies to electricity in excess of 50 megawatt hours per calendar year withdrawn from a network for business purposes by a producing commercial enterprise (Unternehmen des produzierenden Gewerbes) or an agricultural or forestry enterprise as final consumer of the electricity.

The following are considered to be producing commercial enterprises: mining companies, manufacturing companies, construction companies, and electricity, gas, remote source heat, and water utility companies if classifiable in one of these industries under the industry classifications of the Federal Office of Statistics.

An enterprise is considered to be an agriculture or forestry enterprise if classifiable as one of these industries under Section A of the industry classifications of the Federal Office of Statistics.

Except as regards the operation of electric overnight energy storage heaters, the reduced tax rates are conditional on authorisation from the Main Customs Office. This is not deemed to have been automatically issued for the period through the end of 1999 and must accordingly be applied for immediately. Here again, the tax authorities are apparently prepared to issue such licenses retroactive to 1 April 1999 if the licensee so requests in its application.

4.4 Abatement and refund of tax

The new law contains a provision intended to ensure that the increase in taxes on producing commercial enterprises as a result of the tax on electric current is not substantially disproportionate to the tax relief afforded them by the reduction in social charges (see sec. 1 above).

Electricity tax in excess of DM 1,000 (EURO 511 = US-$ 547) potentially qualifies for abatement or refund if owing or paid by a producing commercial enterprise as a user of self-generated electricity or a final consumer of electricity supplied by another. The amount of the abatement or refund is limited, however, to the excess of electricity tax for the calendar year over 1.2 times the amount by which the taxpayer's employer contribution to the statutory pension system for the same period in the year 1998 would have been reduced if the reduced contribution rate in force as of 1 April 1999 had been in force in 1998.

5. Details of the tax increases on fuels

The tax increases on petrol, heating oil, natural gas, etc. are all contained in the mineral oil tax law (Mineraloelsteuergesetz).

5.1 Supplemental taxation of "old" mineral oils

Mineral oils (including petrol) for which tax has already been paid at the rates in force through 31 March 1999 are generally subject to a supplemental tax to bring the excise tax on such fuels up to the new levels. The person in possession of such oils on 1 April 1999 is liable for the tax.

Exemptions from the supplemental tax apply in the following cases:

  • For oils in engines including the engine's main and reserve tank; and
  • For oils in the direct possession of final consumers, provided they are stored in facilities for self-supply with fuels or in the tanks of heating facilities.

A final consumer is a person who has procured the oils for his own use and for supply to dependants, association members, or his own employees and who does not supply the oils commercially to third parties.

5.2 Tax reductions

There are tax reductions in various amounts for certain fuels (e.g. heating oil) shown to have been taxed at the rates in effect from 1 April 1999 onwards (or subjected to the supplemental tax). The reduced rates are available to producing commercial enterprises, agriculture and forestry enterprises, and non-producing commercial enterprises provided they use the fuel for certain qualifying purposes (indirect or direct heating, production of certain gases, driving certain gas turbines or combustion engines in stationary facilities, or simultaneous generation of electric power and heat). The reduced rates also apply to other companies using the fuels to generate heat for purposes of generating electricity or for simultaneous generation of electric power and heat or in other types of facilities for simultaneous generation of electric power and heat.

Again, authorisation is required to qualify for the reduced rates. However, until further notice the authorisation is deemed to have been granted to all taxpayers.

5.3 Abatement or refund of tax

The tax on certain types of oil and for natural gas, liquid gas, and other gaseous hydrocarbons shown to have been taxed at the rates which took effect on 1 April 1999 can be partially abated or refunded on request by a producing commercial enterprise which uses the fuels for qualifying purposes (direct or indirect heating, production of certain gases, driving certain gas turbines or combustion engines in stationary facilities).

The abatement or refund is limited to the excess tax paid as a result of the new tax rates. In certain cases, it is not possible to obtain complete abatement or refund of the tax increase under this provision, however.

Abatement or refund can also be requested by a producing commercial enterprise using fuels for which tax increases went into effect on 1 April 1999 for certain purposes if the excess tax resulting from the fuel tax increases plus the excess tax resulting from the new tax on electric current exceeds the deemed tax savings by reason of the reductions in employer social security contributions by a factor of more than 1.2. As for the similar provision in the tax on electric current (see sec. 4.4 above), tax is refundable to the extent it exceeds DM 1,000 and 1.2 times the tax savings which would have resulted if the reduced rate for employer social security contributions which went into effect with the energy tax increases on 1 April 1999 had been in effect in the corresponding period in the year 1998.

6. Conclusion

The coalition government of Social Democrats and Greens which took office in October of 1998 has enacted energy taxes with ambitious objectives as regards both ecology and unemployment. While the dimensions of the new measures are significant, they are not in themselves expected to produce dramatic results. Proponents claim no more than that they represent a turning point down a new road to ecological taxation, not that they move Germany very far down this new road.

Whether the theoretical premises of ecological energy taxes are sound is intensely controversial. Even admitting this to be the case, grave doubts would exist whether successful implementation of such taxes is possible on a merely national scale. Two further phases of energy tax increases are under discussion. While significant, they also are not radical, and their ultimate implementation is speculative.

Reductions in social security contributions have gone into effect at the same time as the energy tax increases, which contain provisions to keep the burden of the new taxes in approximate balance with the benefits of the reductions in employer contributions to social security for manufacturing industries. There are also numerous exceptions and reduced rates associated with the new energy taxes, again intended to avoid excessive burden on manufacturing industries. Whether the new measures will function smoothly as a purely mechanical matter is unclear, particularly with respect to the completely new and hence untried tax on electric current.

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