Ecological Tax Reform even if Germany Has to Go It Alone

DIW Weekly Report 7 / 1994, S. 3-10

Stefan Bach, Michael Kohlhaas, Barbara Praetorius


The need to realise sustainable economic development, which preserves the basis for human existence, is now widely recognised. Natural resources must be used more economically and the burden on the environment eased. The traditional instruments of environmental policy, in particular the use of regulatory law dominant in Germany, are inadequate for this purpose and induce economic costs which are unnecessarily high. In the light of this, an ecological reform of the taxation system involving the greater use of environmental charges is a demand which has been frequently raised in the environmental discussion. Such a reform, it is argued, would enable environmental objectives to be realised more efficiently. The revenue from such taxes is to be refunded to those social groups paying the tax, or other taxes or charges are to be reduced to a corresponding extent. On behalf of Greenpeace, the DIW has examined the economic effects of an ecological tax reform, taking, as an example, an energy tax the revenue from which is returned to firms in the form of a reduction in employers' social insurance contributions and to private households in the form of a per capita allowance ("eco bonus"). The study shows that a tax reform along these lines would be feasible in legal terms and would have positive economic effects, even if it were implemented in a single country. The reform induces a process of ecological and economic structural change which would be conducive to employment. There are no grounds for the fear that such an ecological tax reform would endanger German competitiveness.

Stefan Bach

Research Associate in the Public Economics Department

Michael Kohlhaas

Research Associate in the Energy, Transportation, Environment Department