In the German government, climate finance lies within the remit of the Federal Ministry of Finance. In the period up to 2023, Germany plans to invest €54 billion in climate-friendly infrastructure and technology, together with accompanying social equity measures. In recent months, the Finance Ministry has swiftly launched new legislation to accompany the Climate Action Programme 2030. This is a crucial step to ensure the programme’s quick implementation.
We intend to press forward with the technological advancement of our country and to create the conditions that will enable us to achieve a climate neutral economy by 2050.Finance Minister Olaf Scholz
The German government’s new stimulus package places a priority on climate protection, which is of utmost importance for the future of our country and our communities. This includes a programme to invest in Germany’s future: targeted measures totalling €130 billion will give a boost to workers and families, stabilise businesses, and promote future-friendly development. All of this will be done to ensure that Germany emerges from the Covid-19 crisis with renewed strength. Detailed information on the stimulus package.
Our climate action measures:
Germany is the first advanced economy that plans to make a full and final switch to renewable energy sources. On 29 January 2020, the German cabinet adopted the Act on the Reduction and Termination of Coal-Fired Electricity Generation and Amending Further Acts (Gesetz zur Reduzierung und zur Beendigung der Kohleverstromung und zur Änderung weiterer Gesetze). The bill sets out a detailed roadmap for shutting down coal-fired power stations, which are harmful to the climate. The Federation has allocated €40 billion for the necessary structural changes. These funds will help affected regions to build new capacity and create new jobs.
The legislation provides for the following measures:
- Reduction and termination of electricity generation from coal and lignite
- Cancellation of CO2 allowances that become available
- Compensation for electricity consumers in the event that the price of electricity rises as a result of phasing out coal
- Payment of an adjustment benefit to older employees in the coal industry to make it easier for them to retire
- Extended period of applicability and update of the Combined Heat and Power Act (Kraft-Wärme-Kopplungsgesetz) to promote the transition from coal to flexible, climate-friendly electricity generation
Germany recently adopted the Tax Incentives for Electric Mobility Act (Gesetz zur steuerlichen Förderung der Elektromobilität), which aims to increase the share of low-emission cars on the country’s roads. Tax incentives for electric mobility help to reduce pollutant emissions from road traffic at their source and thus to promote cleaner air, especially in cities.
The target is to increase the number of electric vehicles in Germany to 7-10 million by 2030. The Tax Incentives for Electric Mobility Act contains a wide range of measures that aim to achieve a significant increase in the sales share of new vehicles that run on power other than fossil fuels, and thereby to reduce carbon emissions from car traffic:
- Taxation of business cars: extended period of applicability for special rules on electric vehicles
- Special depreciation rules for electric delivery vehicles
- Trade tax relief for renting and leasing electric vehicles
- Extension of tax exemption period for electricity used to charge vehicles; flat-rate (lower) taxation in cases where employers make charging equipment available to employees
- Tax exemption for employer-subsidised public transport passes and (in cases where this is beneficial for taxpayers) new rule permitting flat-rate (lower) taxation of such passes
- Extension of tax exemption period for business bikes and electric bikes that employers place at the disposal of their employees
- Extension of tax exemption period for the private use of business bikes and electric bikes
Two factors that play a particularly important role in efforts to promote electric mobility are (a) the use of sustainable energy sources and (b) sustainable processes for producing batteries. For electric vehicles, the production of battery cells accounts for about one third of value added. This is why battery cell production is such a high industrial policy priority in Germany and Europe. At the same time, carbon emissions in connection with cell production could be reduced significantly in Europe if steps are taken to ensure sustainable, low-carbon production processes.
Until recently, travelling during the coronavirus pandemic has not been an option. But as people start to travel more, the German government has taken steps to ensure lower rail travel prices and higher air travel prices. For example, VAT on rail tickets was lowered as of 1 January 2020 (from the standard rate of 19% to the reduced rate of 7%). Aviation tax was increased starting on 1 April 2020 in order to make air travel less attractive. In order to ensure that the right incentives are set, tax rate increases vary according to the type of plane ticket. For example, the tax rate for shorter flights saw a sharper increase of 74% (from €7.50 to €13.03 per flight) for flights within Germany, the EU and EFTA. The tax rate on longer flights was raised by approximately 41%: by €9.58 (to €33.01 per flight) for flights ranging from 2,500 to 6,000 km, and by €17.25 (to €59.43 per flight) for flights over 6,000 km. These tax adjustments go further than many measures taken by other EU member states.
In addition, the coronavirus pandemic has highlighted the advantages of riding a bicycle. Cycling is healthy, good for the environment, and gets people to their destinations with a minimum of social contact. The German government is making bike travel more attractive by taking steps to further improve road safety and road traffic conditions for cyclists. For example, it is making investments to enhance bike-friendly conditions that benefit all citizens and reduce carbon emissions, including:
- Expansion of cycle superhighways and cycle paths on federal highways
- Special programmes for urban and rural bike traffic that ensure the equal status of cycling as a form of travel (safe and up-to-date bicycle parking facilities, expansion of infrastructure for cargo bikes)
- Financial assistance for Land and local authority investment in: cycle networks; safe and up-to-date parking facilities; expansion of cycle paths on regional roads; and better infrastructure and transport conditions for cargo bikes
These large-scale investments and the resulting infrastructural improvements will reinforce current trends towards the increasing use of electric bikes and other new forms of mobility.
The German government intends to increase its support for energy-efficient building retrofits. It is creating incentives that will encourage people to make climate-friendly choices when they renovate buildings. For example, financing will be made available for the installation of new heating systems that emit less carbon and are thus better for the climate. From 2026 onwards, the installation of oil heating systems will no longer be permitted in buildings that are capable of using other, more climate-friendly types of heating. This is a major step forward.
As of 1 January 2020, certain costs for retrofits of owner-occupied housing are deductible under income tax law, regardless of a taxpayer’s income. This is subject to the condition that the building in question must be at least 10 years old. Taxpayers can claim this relief in their tax returns, so the process is easy and unbureaucratic. Homeowners will be able to deduct costs incurred for individual retrofitting measures (such as the installation of new windows) as well as for comprehensive building retrofits. In total, homeowners will be able to claim tax deductions for retrofitting costs of up to €200,000 per residential building.
Carbon pricing is based on a simple principle: whoever is responsible for carbon emissions should pay for them, and whoever reduces carbon emissions should benefit. Up to now, this has applied only to the manufacturing and energy industries, which are already subject to the EU’s emissions trading system. Now Germany is introducing its own emissions trading system, which will launch in 2021. The new system will work like this: Companies that put fossil fuels into circulation will be required to purchase emissions allowances. They will then have to give up a certain number of allowances for each tonne of carbon generated by these fuels. These companies can pass the costs of the allowances on to consumers, in the form of higher prices on fossil fuels such as heating oil, natural gas, petrol and diesel. In turn, the revenue from carbon pricing will be completely reinvested in climate action measures or returned to taxpayers.
This will have the effect of making climate-friendly products and behaviours more attractive and, as a result, influencing consumers’ purchasing decisions when they buy things like cars and heating systems. There will be a fixed price on carbon emissions for the first five years. The price will start out at €25 per tonne of carbon emissions in the first year (2021), rising incrementally to €55 per tonne in 2025. This fixed-price regime is important, as it will provide consumers and businesses with the reliability and predictability they need in order to make larger-scale purchasing and investment decisions. In 2026, allowances will be auctioned within a price range of €55 (minimum) to €65 (maximum) per tonne of carbon emissions. The level of market demand will determine the price within this range. The specific design of the national emissions trading system for the years from 2027 onwards will not be decided by the German government until 2025, because by then there will have been an opportunity to gain more detailed experience with emissions trading schemes. Ultimately, the German government wants to eliminate the minimum and maximum price thresholds and to set emissions levels that are consistent with Germany’s climate targets.
All carbon pricing revenue will be used for climate policy measures and social equity measures, and in particular to reduce to the surcharge that electricity consumers pay for the purpose of promoting renewable energy sources (this surcharge is levied on the basis of the Erneuerbare-Energien-Gesetz (Renewable Energy Sources Act), or EEG, so the surcharge is commonly referred to as the “EEG surcharge”). Future increases in carbon pricing revenue will be used in their entirety to reduce the EEG surcharge. Higher revenue from carbon pricing will thus lead to lower electricity prices. This will help low-income earners in particular while also making electricity-powered products (like heat pumps and electric cars) more affordable. Specifically, the government plans to reduce the EEG surcharge by €5.4 billion in 2021, which would reduce the average household’s annual electricity bill by about €60. As the carbon price rises, the EEG surcharge will be cut even further, leading to annual savings of about €103 for the average household in 2025.
In addition, support will be provided for people who have to travel long distances to get to work and who will be more heavily impacted by the carbon pricing scheme. Some people do not have the option of riding a bicycle or taking public transport to get to their workplaces. In order to avoid putting long-distance commuters at a disadvantage, the German government will increase the commuter tax allowance from 30 to 35 cents per kilometre for distances of 21 kilometres or more. From 2024 onwards, the commuter tax allowance will be increased by an additional 3 cents for a period of three years (to 38 cents per kilometre for distances of 21 kilometres or more), in order to mitigate the higher prices of diesel and gasoline resulting from the carbon pricing scheme.
Furthermore, in the years from 2021 to 2026, low-income earners will be able to claim a “mobility premium” for long-distance commutes of 21 kilometres or more. This will ensure support for commuters who pay no income tax due to their low level of income and who therefore do not qualify for the commuter tax allowance.