A Green Financial Reform to Pay the Deficit Caused by the Crisis

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May 18, 2010

By Damian Ludewig

The ecological challenges are enormous. To reduce within 40 years CO2 emissions by 95 per cent is not something that can be done casually. The problem of species loss is unsolved, too: Currently 150 species go extinct every day. As long as there are financial incentives that point the other way, we will not be able to solve these and other environmental problems within a market economy.

State finances still draw to over two-thirds on taxes to do with the workplace, while taxes on the utilisation of nature account for less than 10 per cent. State finances will have to be put on a new base. Instead of taxing something we would like to promote, i.e. jobs, we should tax what we would like to bring down, i.e. the depletion of nature. Against the background of demographic change, too, it does not make sense to base state finances on the ever decreasing number of jobs. In the mid-term, the state will have to generate its revenue from taxes on resource consumption and pollution.

When it comes to spending, non-ecological incentives prevail too: According to our calculations, subsidies for tax deductions detrimental to the environment (e.g. exemptions from eco-taxes) or direct payments to support ecologically harmful behaviour (e.g. subsidies for coal mining) add up to 34 billion Euros per year – and that in Germany alone! The German Federal Environment Agency even calculates the amount as 42 billion Euros – well above the amount Germany makes from eco-taxes or will contract as debt. Although regulatory laws are important in many sectors, it is clear that without a massive correction of such structurally false incentives we will never be able to save the environment and nature. The green tax reform was an important first step. Yet, in the meantime, the percentage of eco-taxes in relation to the budget as whole has almost dropped below the level reached the year before the green tax reform was introduced.

In the months to come a crucial question will be how the government is planning to finance the huge additional expenditure incurred through its stimulus packages. Will there be higher non-wage labour costs and a renewed increase of VAT – or will we take the opportunity to finance additional expenditure through smart taxation? So far, the German government has failed to spend sufficiently on ecologising the economy. According to a study published by us, only 13 per cent of the two stimulus packages was money spent on sustainable projects. Further spending will seriously stretch the limits of what is feasible. Thus, additional spending necessary to achieve an ecological turn-around of the economy will have to come from incentives for greater resource efficiency. We need taxes that help solve problems, not taxes that create or even exacerbate them.

Green Budget Germany has therefore drafted a model for a socially acceptable ecological tax reform that, if implemented, could, in the mid-term, increase the states financial leeway by around 40 billion Euros. This would be a substantial portion of the amount necessary to finance the deficit caused by the economic crisis. In the mid-term other taxes or levies (e.g. non-wage labour costs) could be cut.

Overall, Green Budget Germany is suggesting changes in thirteen areas, most of them to do with energy and transport. For example, current practice is to give the greatest tax benefits to such users of company cars that purchase the most expensive vehicle with the highest mileage – and who use them most frequently for private business. The government thus looses nine billion Euros of revenue each year. This is not only a considerable financial, but also a costly ecological loss. Presently, over 60 per cent of new cars are government or company-owned. Through such false incentives, the state subsidises out-dated motor pools and thus endangers the competitiveness of the German car industry. As company cars are being quickly resold they corner the market in second-hand cars, and this means that most low-income people have to buy petrol guzzlers, too. Consequently they are paying the price for subsides handed out to those with the privilege of having a company car.

All things considered, a comprehensive green tax reform has the potential to contribute to solving the climate as well as the debt crisis, while also prompting ecological innovation and creating new job opportunities. In the face of considerable inertia, opposition will have to be overcome – yet it is certainly worth the effort.

The study is available in German.

Green New Deal / Great Transformation

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