Environmentally Harmful Subsidies

chimneys and a brown coal mineClick to enlarge
Subsidisation of lignite mining for energy is harmful to the environment.
Source: blumenkind / Fotolia

Environmentally harmful subsidies comprise a double burden on the national budget: firstly, as excess expenditure by the state and loss of tax revenue; secondly due to the increased costs for clean-up of damage to the environment and health. Environmentally harmful subsidies worth over €57 billion were granted in 2012.

Table of Contents


Direct and indirect subsidies

The term “subsidy” should be defined in a broad sense in order to cover all cases of preferential treatment of environmentally harmful economic activities. In addition to financial assistance and tax concessions which benefit enterprises and consumer households directly, indirect subsidies which have no direct budget impacts must also be scrutinized for possible negative impacts on the environment. The latter include federal export credit guarantees or the government provision of goods at prices other than market prices as well as preferential treatment through regulations which grant an exemption to open-cast lignite mining from the applicable production charge.

Why it is necessary to reduce environmentally harmful subsidies

Environmentally harmful subsidies cause polluters to pass on some of the costs of their production and consumption to the state and society, for example in the form of higher healthcare costs or costs to clean up environmental damage which has been done.

Environmentally harmful subsidies also distort competition at the expense of environmentally sound technologies and products. This blocks environmental protection efforts and slows down the shift to sustainable patterns of production and consumption. To offset these disincentives the state must give more support to environmentally sound technologies and products such as renewable energies. This is the only way they will have a fair chance of becoming established on the market.


Environmentally harmful subsidies in Germany

In 2012 environmentally harmful subsidies in Germany amounted to more than €57 billion (see „Umweltschädliche Subventionen in Deutschland“ brochure). The report gives an overview of the main federal subsidies only and largely ignores assistance programmes at regional and local levels. Furthermore, in some cases it is not possible to quantify the environmentally harmful component of the subsidies. The figure of €57 billion therefore represents the floor of environmentally harmful subsidies.

The range of environmental pollution caused is broad. Subsidisation leads to damage to water, soil and air, increased land take and loss of biodiversity. The table shows the primary effects, in other words direct adverse impacts, of subsidies, and also the secondary (indirect) effects. The reduction on electricity tax and energy tax for the manufacturing industries thus results in a direct impact on the climate because of these industries’ higher consumption of fossil fuels. The indirect adverse impact of this consumption on water, soil and biodiversity is due to the necessary increased mining of fossil fuels.

An analysis of subsidies policy in recent years shows a very mixed development. Some environmentally harmful subsidies are due to run out in the next few years or have been reduced. These include the general energy tax reduction for the manufacturing and agricultural sectors, the coal subsidies, the home ownership grant and the subsidies for the production of spirits. At the same time, however, the German Government has also introduced new environmentally harmful subsidies or expanded existing ones. This applies, for example, to the tax concession for agricultural diesel, the energy tax concessions for mobile machinery and vehicles used exclusively for goods handling in seaports, and the grants to electricity-intensive enterprises to offset electricity price increases due to emissions trading. There has thus been no recognisable sign in recent years of a systematic reduction in environmentally harmful subsidies.


Subsidies by sector

Subsidies in the energy sector

Subsidies of €20.3 billion are provided to the energy supply and use sector. This applies not only to extraction of the energy sources (e.g. coal and lignite), but also to energy generation. Subsidies that lower the price of energy reduce the incentive to make economical and efficient use of energy. This results in higher energy consumption along with energy-induced environmental pollution. Examples of subsidies include electricity and energy tax reductions for the manufacturing industry, the peak equalisation scheme for eco tax in the manufacturing industries, or the free allocation of CO2 emissions trading allowances.

Subsidies in the transport sector

Subsidies in the transport sector in the amount of €28.6 billion contributed to environmental pollution in 2012. Air transport accounts for a large proportion with a share of nearly €12 billion. The industry enjoys exemption of kerosene from energy tax and VAT exemption for international flights. Subsidies for air transport distort competition at the expense of the railways and other more sustainable modes of transport.

Subsidies in the construction and housing sector

The construction and housing sector received environmentally harmful subsidies totalling €2.3 billion in 2012. This provides undifferentiated incentives for new housing construction or developing new industrial, commercial and transport areas and thus favours urban sprawl. State funds do not differentiate between previously used land newly developed “greenfield” sites.

Subsidies in agriculture and forestry, fisheries

The agriculture, forestry and fisheries sector received subsidies totalling €5.8 billion in 2012, which is a marked increase compared to the figure in the previous report. This is because the environmentally harmful VAT concessions for animal products have been quantified for the first time. A quantification of many other environmentally harmful subsidies in this sector is not possible at the present time. Therefore, the volume of subsidies indicated represents only part of the environmentally harmful subsidies granted in this sector.

Breakdown of subsidy volume by sectors
Breakdown of subsidy volume by sectors
Source: Umweltbundesamt

EU and international level

Germany also has international obligations to abolish subsidies. The Kyoto Protocol explicitly calls for the elimination of subsidies which interfere with the reduction of greenhouse gases. The G20 decisions in Pittsburgh in September 2009 include a commitment from Germany to discontinue subsidisation of fossil fuels in the medium term. In its Europe 2020 strategy and Roadmap to a Resource Efficient Europe the European Commission calls upon the Member States to phase out subsidies with a negative impact on the environment. Agenda 2030 and its 17 Sustainable Development Goals (SDGs), which all the member states of the United Nations adopted in 2015, also targets inefficient subsidies for fossil fuels in the area of responsible consumption.