Energy tax 2.0: Reforming energy taxation to support climate protection

With a volume of more than 40 bn € and a share of 5.5 % in the total tax volume in 2019, the energy tax is one of the most important taxes in Germany.

It is not only of considerable economic importance for the federal budget but is also intended to provide incentives for a reduced energy consumption. However, the energy tax so far lacks an explicit reference to climate policy - both in Germany and at a European level. Therefore, the energy tax system no longer appears up-to-date.

Following the Paris climate agreement, at the very least,  energy policy must be aligned with climate protection targets. Plus, there is now an increasing number of innovative processes, e.g. in the field of alternative fuels and combustibles, that should also be exploited for the energy transition in order to ensure that climate targets are fulfilled.

In a study commissioned by MWV (Mineral oil industry association) and IWO (Institute for heat and mobility), we suggested how to design the energy tax in a way that creates climate protection incentives and we looked at the European framework that the reform needs to be based on.

In essence, our energy tax 2.0 approach is based on a change in the assessment basis. Instead of a quantity-related tax for each of the fuels and combustibles or a taxation based on their respective energy content, taxes should vary with their degree of contribution to climate protection targets. Focusing on the carbon content means choosing a basis for taxation that is both consistent from a tax systematic point of view and at the same time precisely addresses the main source of the energy-related greenhouse gas effect.

Compared to today’s energy taxation system, the assessment basis and balancing applied in the energy tax 2.0 approach would only need to be aligned with climate political requirements. Tax liability and liability to pay tax would remain untouched.  This implies a taxation that is comparably simple and requires little administrative efforts. Compared to today’s practice, the new approach would require a mass balance proof which may lead to a refund of overpaid taxes or to back taxes, respectively.

This would not imply an additional burden on consumers. As long as the 2003 energy tax law is reformed as requested by the Commission, i.e. such that it allows  energy taxation that focuses on climate impacts, the reform model can serve as a blueprint for the concept of the directive. Against this background, a constitutional energy tax reform seems to be feasible.

Frontier regularly advises on energy transition, on the use of hydrogen and alternative fuels and combustibles and on climate policy law.

For more details please contact us at or at +44 (0) 20 7031 7000.