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German Fuel Tax Questioned

by Ulrika Lomas, Tax-News.com, Brussels

12 April 2010


According to experts from the Deutsche Institut für Wirtschaftsforschung (DIW), the largest economics research institute in Germany, an environmental tax levied on motor vehicles serves only to slightly slow the increase in traffic volume. The long-term trend towards the increased use of motor vehicles remains problematic, it emphasizes.

Although the DIW notes that the introduction of an eco tax has led to a reduction in the volume of traffic growth over the course of the past few years, achieving a positive effect on carbon dioxide emissions, the institute highlights the fact that the tax only has a slight – though measurable – steering effect. A fundamental reversal of the long-term trend towards increasing motor vehicle use will not be achieved by the tax alone, however, the DIW points out, as, although motorists do indeed react to petrol price increases, a rise in household income can serve to counteract the effect.

In its latest publication, DIW expert Viktor Steiner confirms that, in general, private households react to higher fuel prices by driving less. Steiner maintains that a 10% rise in petrol prices leads to a 2% reduction in the number of kilometres travelled, corresponding to a total distance of 200km per household over the course of a year. In the case of the eco tax, this would serve to reduce carbon dioxide emissions by as much as 120kg per household per year.

However, according to the DIW, a rise in income leads in turn to increased car use, thus reducing the steering effect of the eco tax. The DIW calculates that a 10% increase in private income results in a 4% increase in the distance travelled a year.

Consequently, the DIW concludes that although an eco tax has a positive, albeit limited, effect on the environment, the tax alone will not serve to significantly reduce carbon dioxide emissions from cars meaning that additional environmental measures would be needed alongside. Without such a tax, however, the DIW firmly believes that the volume of traffic would inevitably have increased more.

As a result of the ecological tax reform in Germany, and the introduction of an eco levy, petrol and diesel prices rose gradually between 1998 and 2003 by over 20%, the DIW reveals, generating (since its full implementation) in the region of EUR18bn annually for the government.

TAGS: individuals | environment | tax | economics | law | environmental tax | Germany

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