Plea for a sustainable tax reform

Researchers from the Copernicus project Ariadne, which is funded by the German Federal Ministry of Economy have now estimated the extent of all external costs for environmental and health damage in Germany. They amount to a figure of between 13 and 19% of Germany's GDP, the experts have now announced.

"These environmental and health damages are ultimately borne by everyone - we are now making this loss of our prosperity visible in concrete euros for the first time," says Matthias Kalkuhl from the Berlin-based climate research institute MCC (Mercator Research Institute on Global Commons and Climate Change), which is part of the Ariadne project. "We have analysed the external costs of doing business in Germany more comprehensively than ever before and, in a first synthesis, come up with an estimated corridor of 455 to 671 billion euros."

Money that would be better invested elsewhere. And it turns out that the environmental or incentive taxes in use so far, such as CO2 pricing, truck tolls, energy taxes and other consumption taxes, are not yet targeted enough to cover the consequential costs. For example, the revenue from environmental taxes in 2019, at 107 billion euros, is much lower than the price paid for the actual damage.

At the same time, more targeted environmental or incentive taxes on these damages can be charged directly to the polluters and thus provide strong incentives for more sustainable economic activity.

"Taxes and levies on products or consumption with societal consequential costs (external costs) - so-called Pigouvian or incentive taxes - are a political win-win instrument. They improve welfare and at the same time protect the environment and the climate. This is achieved by giving environmentally damaging activities a price that corresponds as closely as possible to the amount of their damage," the researchers say.

"By taxing consistently on environmental damage, the state could mobilise an additional 44-71% of today's total tax revenue," explains Christina Roolfs of the MCC. "Thus, other taxes could be lowered significantly to relieve citizens. Through tax cuts, direct refunds to people or targeted transfers for particularly affected households, politicians have a lot of room to manoeuvre to make such tax reforms socially just."

CO2 pricing must increase, say the researchers (Image: Pixabay)

Four fields of action were identified for Germany in the research project:

• CO2 prices in emissions trading must be raised to reflect the damage caused by climate change
• in agriculture, a consistent accounting of greenhouse gases and other environmental damages, such as nitrogen input, can strengthen sustainable production methods
• electricity prices need to be better targeted to climate protection, including a reform of the electricity tax, the current level of which in Germany prevents the switch to climate-friendly technologies such as electric cars or heat pumps
• more targeted control of the transport sector, e.g. through toll systems, the proceeds of which will flow into road infrastructure

Through environmental taxes, these costs are no longer arbitrarily distributed among society, but borne by the respective producers and consumers via price. Companies thus have a strong incentive to produce in a climate-friendly way to be able to offer lower prices. Consumers, in turn, can also better take into account the social impact of their trade when shopping in a supermarket, for example. "Ultimately, this increases the prosperity of all," says Maik Heinemann from the University of Potsdam, which is part of the Ariadne project.