Although discussions concerning the potential of ETR already started in the early 1990s in Ger-many, an ETR was finally implemented in 1999. The German energy taxation scheme heavily re-lied on taxes levied on transport fuels as it is the case in all other European countries. However, some differences between Germany and the Nordic countries can be recorded as for example coal was never subject to energy taxes in Germany. Germany introduced an energy tax on natural gas in 1989. Noteworthy to note is the electricity taxation scheme until 1995. This tax scheme was known under the term ‘.RKOHSIHQQLJ’. The revenues of this tax have been earmarked for the subsi-disation of the German coal industry and the scheme was abolished in 1995. The tax was an DG YDORUHP tax and the rates were differentiated between industry and households (see the develop-ment of the main energy taxes in Table A4-3 in the Annex). The energy tax scheme experienced some major changes as part of the ETR.
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The German government pursued to achieve two objectives when introducing the ETR in 1999:
• To improve environmental protection and in particular to reduce greenhouse gas emissions as a means of climate change mitigation.
• To reduce the employers’ and employees’ statutory pension contributions in order to re-duce labour cost and to increase employment.
The ETR was implemented in two phases:
Phase I – 1999 - 2003
• The main policies have been an increase in existing energy taxes and the introduction of an electricity tax (see for a detailed overview: Table A4-3a in the Annex).
o Mineral oil taxes on transport fuels (petrol and diesel) were gradually and steadily increased in five steps between April 1999 and 2003.
o Taxes on natural gas and light heating fuels were increased in 1999 and another in-crease on the natural gas tax took place in 2003.
o Taxes on heavy fuel oil were increased in 2000 and again in 2003. However, the tax on heavy fuel oil used for electricity generation was reduced in 2000 so that the heavy fuel oil tax is equal for all purposes.
o Introduction of an electricity tax in 1999: The tax rate was gradually increased in five annual steps.
o The increase in the tax rates for energy products other than transport fuels imposed on the manufacturing industry and the agricultural sector are lower than the stan-dard increase because of the fear of hampering the competitiveness of German in-dustry (see below for a more detailed discussion).
• The ETR was planned to be revenue neutral. But the German government refrained from this policy goal in the last years by using a small fraction (less than 10% of total revenue raised) for the consolidation process of the federal budget only as a temporary measure.
The major share of the revenues are being used in a tax shifting programme by reducing employers’ and employees’ social security contributions (pension scheme) being paid by the two groups equally (i.e. in a 50:50 ratio). Furthermore, a very small fraction of around 1% has been earmarked for the promotion of renewable energy. The total volume of the tax shifting programme was 18.6 billion EUR in 2003 (around 0.9% of GDP). The adopted recy-cling mechanism resulted that the employers and employees pension contribution could have been reduced by 1.8% from 20.3% in 1998 to 19.5% in 2003. It is estimated that without the introduction of the ETR the total pension contribution would be in the range of 21.2% in 2003 as a consequence of the economic and demographic development in Germany.
• The German ETR approach is insofar interesting because of a slight inconsistency within the tax shifting programme. The main economic sectors affected by the revised energy tax schemes are household, transport and small and medium sized enterprises. But the main beneficiaries of the imposed recycling mechanisms are households and the industry as a whole.
Phase II – starting in 2004
• The German government wanted to extend the ETR to an Environmental Fiscal Reform by focusing on dismantling of environmentally harmful subsidies and other tax reductions and by adapting the heating fuel taxes on natural gas and on heavy fuel oil (as seen in Ta-bles A4-3a and A4-3b in the Annex). The latter policies have been undertaken but the re-form idea of having a major shake-up with regard to subsidies was abandoned because of political resistance, in particular of the opposition.
The total revenues raised by energy taxes under the umbrella of the ETR amount to around 18.6 billion EUR in 2003 and can be broken down to the individual tax as follows: 0.2 billion EUR reve-nue from the tax on heating oil, 3.4 billion EUR natural gas taxes, 6.5 billion EUR from the newly introduced tax on electricity, 2.4 billion EUR from tax on petrol and the major part of 5.7 billion EUR from tax levied on diesel (Cottrell 2004). The tax revenues imposed on energy products other
than transport fuels capture around 10.5 billion EUR and approximately 60 percent of this sum is paid by households. Estimates are showing that around 88 percent of these revenues (9.2 billion EUR) are being used for recycling measures by reducing employers’ and employees’ pension con-tribution. The reduction in the two contributions is equally distributed (4.6 billion EUR) meaning that the industry is a net winner because industry contributes around 4.2 billion EUR effectively to this reduction (Cottrell 2004). The German ETR has achieved the underlying principle of an ETR namely the shifting of the tax burden from labour to energy use although slightly flawed benefit-ing mainly the industry. This favourable treatment of industries becomes more obvious when the special provisions with regard to the industrial energy taxation scheme are assessed.
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Manufacturing industry, agriculture and forestry was granted special energy tax provision from the start of the ETR. Although the scheme was revised in 2003 the basic characteristics remained the same (Bach 2004).
• From 1999 until 2002:
o Manufacturing industry, as well as agriculture, fishery and forestry sector was granted a tax relief of 80% for energy products (heating fuels, natural gas and elec-tricity). The tax relief affected only the tax rates which were imposed as part of the ETR and were only available on the condition that the base amount (¶6RFNHOEHODV WXQJ· of 512.5 EUR per annum– electricity and heating fuels - was exceeded.
o The manufacturing sector was eligible for an additional tax option – companies could apply for a tax cap (‘6SLW]HQDXVJOHLFK’). If the tax burden from increased energy tax rates was 20 percent higher than their tax relief from the reduction in pension contributions, companies were refunded the full differential amount. The outcome of this provision was that some industries had an effective tax rate of zero percent.
• From 2003 onwards
o The tax relief for the manufacturing sector, agriculture, fishery and forestry was re-duced. All companies of these sectors have been granted a tax relief of only 40 per-cent of the standard energy tax rates for electricity, heating oil and natural gas but only for energy consumption exceeding the base amount (¶6RFNHOEHODVWXQJ·which have been kept constant. However, only the increase in energy tax rates as a result of the ETR are reduced, i.e. the increases in the tax rates which took place since 1999. This policy change means that the effective tax rate is now 60 percent of the standard rate as compared to a meagre 20 percent between 1999 and 2003 (see Table A4-3d in the Annex).
o In addition, the additional tax option is still applicable to the manufacturing indus-try but it was slightly revised. The new rule stipulates that a company is eligible for a refund if the energy tax burden is greater than its tax relief from the reduction in the pension contributions payable by the company. However, the refund currently amounts only to 95 percent of the differential amount. The outcome of this revision is that companies which are receiving the tax refund are now facing a tax rate of three percent as compared to the zero percent rule under the 1999 regulation. For example, the standard electricity tax rate in 2004 was 20.5 EUR/MWh. Companies which are statistically classified as manufacturing industries, agriculture, fishery and forestry business are facing an effective tax rate of 60% of the standard rate, i.e.
the electricity tax rate amounts to 12.3 EUR/MWh. Companies of the manufactur-ing industry are facmanufactur-ing an even lower effective tax rate of 0.62 EUR/MWh but only when they qualify for the ‘6SLW]HQDXVJOHLFK’ regulations.
Additional special tax regulations do exist but they are not specifically directed to address com-petitiveness concerns of industry. These provisions are mainly done for environmental reasons by either promoting renewable energies or by promoting improvements in energy efficiency:
o Highly efficient CHP facilities with a monthly or annual utilisation rate of 70% or more are fully exempt from the mineral oil tax.
o Mineral-oil-fired systems using at least 60 percent of the energy in mineral oil are partly exempted from the energy taxes (refund of 3.66 EUR/MWh for natural gas (effective rate: 5.5 EUR/MWh) and 20.5 EUR/1000 litres for light fuel oil (effective rate: 61.4 EUR/MWh).
o Biofuels are fully exempt from mineral oil taxation. This regulation will keep in place up to 2009. It applies to all bioheating fuels, to biogas and synthetic petrol and diesel fuel produced from solid biomass, to bioethanol, biomethanol and hy-drogen from biomass and to all admixtures
o Electricity generated from renewable energies – generated solely with windpower, hydropower (but only for generators with power capacity below ten megawatts), solar power, geothermal power, landfill gas, sewage-treatment gas or biomass – is exempted from the electricity tax.
The German system of energy taxation, in particular introduced as a component of the 1999 ETR process, includes a whole range of special tax provisions for the manufacturing industry as well as for the agriculture, forestry and fishery sector. However, the exact design is rather different from the Danish system because the German regulations are applicable to all companies belonging to the statistical classifications which is in contrast to the Danish case where special tax provisions are only granted to specific defined production processes – not considering the fact that industry is subject to paying energy taxes only for fuels used for heating purposes. The German scheme is furthermore interesting because the clear division between economic sectors targeted via an in-crease in energy taxes and the sectors directly benefiting from the recycling measure has been abol-ished. This issue must be perceived of central significance because the overall tax burden of the manufacturing industry has been lowered as a result of the tax shifting programme.17 However, the German scheme of granting tax reduction to manufacturing industry as a whole was approved by the European Commission in 1999 but must be revised latest until the end of 2006. The tax ex-emptions granted to the manufacturing sector qualify as state aid for environmental protection and they are in accordance with EU law, in particular they do not oppose the community guide-lines on competition. EU law allows the provision of tax exemptions if the affected sector requires
‘temporary relief’ from environmental taxes.