As Cyprus designs a green tax shift, what successes can it look to?
As work begins in Cyprus to implement a green tax shift, Green Budget Europe looks at the 1998 – 2013 reform process in Germany, Europe’s most successful example to date.
Cyprus is the latest country to show a progressive stance to reduce labour taxes in the midst of high levels of unemployment. The government has recently decided to form a “Working Group on Green Tax Reform” led by Theodoros Zachariadis, an academic and Board member of Green Budget Europe. The mandate is to prepare a proposal for a green tax shift and the removal of environmentally harmful subsidies by autumn 2016.
This highly commendable move comes after Dr. Zachariadis circulated a policy brief by GBE in April 2015, urging authorities to adopt such a tax shift. And it follows on the back of an event on Environmental Fiscal Reform co-organised by GBE, which offered suggestions to Finance Minister Mr. Haris Georgiades.
Germany: a success story
During its meetings in Cyprus, GBE highlighted the experience of the German government, which introduced the ecological tax reform in 1999.
Between 1999 and 2003, Germany increased energy taxes in five stages, with 88% of the revenue used to reduce pension contributions. Over this period, the tax take from energy increased by 55%, rising from €34 billion in 1998 to €53 billion in 2003. Public transport use experienced annual increases by 3 – 5%. Sales of transport fuel for private vehicles declined, dropping by around 17% over the ten years after 1998.
In 2002 Germany’s Federal Environmental Bureau concluded that the reform accounted for 60,000 new jobs and contributed to cut emissions by 7 million tonnes between 1999 and 2003.
When the fiscal crisis struck and substantially increased the need for revenues in 2011, several additional elements were implemented. These include a nuclear fuels tax, an air ticket tax, and the reduction of industry subsidies.
Support for ecological tax reform is also a substantial driver for the Energiewende – the transition process to clean energy in Germany, which is currently also one of the most successful in the world. And it’s not just Germany.
Belgium and diesel taxation
Belgium is the member state to undertake a significant tax shift most recently (October 2015). As part of a wider tax shift, the Belgian government will increase diesel tax by 14 cent over three years, becoming the second EU Member State – after the UK – to equalise tax rates on diesel and petrol. In 2016 and 2017, the diesel tax in Belgium will increase by 4 cents a litre, and finally by 6 cents/L in 2018. At the same time, the government has plans to reduce petrol tax by 2.6 cents/L a year in the three years 2016-2018.
The reform is expected to reduce labour taxes by €7.2 billion by 2018. The single largest change is €2.7 billion of additional taxes with environment and health benefits (e.g. higher diesel taxes; a sugary drink tax), a further €2.4 billion in capital taxes, with the remaining €2.1 billion coming from anti-fraud measures, federal administrative changes and other reforms.
Belgium expects to unlock an additional €4 billion in purchasing power and a further €3 billion in enhanced competitiveness. The reform favours the lower paid. Those on gross monthly wages of €1,500 are to gain an additional €140 per month while employees earning €3,300 will take home an additional €90 a month. There are also gains for pensioners, those on social security and an enhanced mobility allowance.
The focus in Europe at the moment is on diesel due to recent studies showing the negative impact it has on air pollution, health and climate.
As Germany has proved in the past, green taxes can be a progressive tool in the hands of policy-makers to ease labour taxes, boost employment and encourage investment in the green economy. Belgium, where labour taxes in 2015 were the highest in Europe, has decided to capitalise on this opportunity. The coming months will tell if it will be “next stop Nicosia”.