Germany, Europe’s green leader

Green infrastructure such as green roofs, green facades and permeable pavements get various incentives [GALLO/GETTY]

Berlin, Germany – How does one “green” an economy? For governments seeking a cleaner, more efficient and ultimately more sustainable pathway to economic prosperity, this question entails both promise and great challenges. For one, the scale of transformation it requires is exceptionally daunting: in his 2011 State of the Union speech, for instance, President Barack Obama called on the United States to generate 80 per cent of its electricity from clean energy sources and to give 80 per cent of Americans access to high-speed rail, both within 25 years. Compared to where the country stands now, these objectives presuppose unprecedented levels of investment in new infrastructure, new technologies and relevant skills and education; yet at the same time, they also hold the prospect of new opportunities for job growth, innovation, industrial efficiency, and energy independence.

With that in mind, one will invariably wonder, is such a transformation feasible at a time of constrained public budgets and slowly recovering economies? And perhaps more importantly, are the expected benefits of such a green transformation compelling enough to persuade a public that is exposed to conflicting messages about the underlying rationale, is critical of new regulation and expenditure, and generally is disillusioned with political authority?

Fortunately, the green transformation of economies is no longer a theoretical concept. Several nations have put the green economy to the test. While far from being the only country to venture down this path, Germany has earned wide recognition for its successful alignment of prosperous and sustainable growth. Unlike many of its European neighbours, Germany has emerged from the recent recession with a robust economy, thanks to flourishing exports. Germany has a dominant market share in various green technologies as well as a substantial part of its workforce employed in the environmental sector. Meanwhile, greenhouse gas emissions have fallen in absolute terms, effectively decoupling economic growth from Germany’s environmental footprint.

Admittedly, not all factors contributing to this success story can be replicated in other countries and regions: challenged with scarce natural resources and a high population density, Germans have traditionally been forced to embrace sustainability in virtually all facets of economic activity, from land use to transportation. Historical transition processes, such as post-war reconstruction and, more recently, the reunification of East and West Germany, also resulted in the renewal of infrastructure and replacement of outdated industrial facilities.

Still, the greening of the German economy is also unmistakably the product of several decades of targeted policy design and implementation, particularly in the past decade. Policies related to environmental protection and resource conservation have been mainstreamed in all areas of economic activity and have been described by a former government minister as central to Germany’s recent success: “green policy is merely good industrial policy.”

Energy tax reform

After months of heated political debate, especially regarding the role of nuclear power in Germany’s energy mix, the federal government adopted its new Energy Concept document in September 2010, setting out a broad framework for German energy policy until 2050. Developed by the ruling centre-right coalition, this document aims at turning Germany into one of the “most energy efficient and greenest economies in the world, while enjoying competitive energy prices and a high level of prosperity.”

In line with a campaign pledge set out in the government’s coalition agreement, the new energy policy defines ambitious targets for the medium and longer term: primary energy consumption is to fall by 20 per cent from 2008 levels by 2020, and at least 50 per cent by 2050; renewable energy is to account for 18 per cent of final energy consumption in 2020, and at least 80 per cent of electricity consumption in 2050; and greenhouse gas emissions are to see cuts of 40 per cent by 2020 and at least 80 per cent by 2050, both relative to 1990 levels.

Energy pricing through taxes and other fiscal instruments has traditionally held a prominent position in the German energy policy mix. As any visitor to Germany will be quick to notice, gasoline prices are significantly higher than in most other regions: in early 2011, a gallon of regular gasoline cost over US $7, more than double the average price in the US. The price difference is almost entirely due to higher tax rates on oil and other fuels, a system of excise taxes that dates back to pre-war Germany and has since been harmonised at the European level.

It was not until the late 1990s, however, that energy taxation also became a vehicle for Germany’s green agenda. In 1998, a centre-left coalition of Social Democrats and Green Party members pledged to introduce new fiscal instruments to reduce the tax burden on labour and shift part of it to energy consumption. This campaign promise sought to harness the multiple dividends invoked by advocates of environmental taxes, including greater flexibility and cost efficiency than traditional regulation, incentives to develop innovative clean technologies and the ability to raise revenues for public investments or tax cuts in other areas, such as labour costs.

In 1999, the German legislature passed the Ecological Tax Reform Act, which mandated gradual increases in the tax rates on oil and gas and introduced a new levy on electricity. This initiative encountered public opposition. Resistance to this measure was, in fact, so great that many observers expected the energy tax project to be a casualty of partisan politics.

And yet, in 2006, new legislation by the European Union and a change of government in Germany, heralded a new chapter in German energy taxation. That year, the legislature adopted a comprehensive Energy Tax Act, setting up a common fiscal framework for energy products through harmonised definitions, taxation rules and exemptions. This led to a complete revision of the framework for energy taxation in Germany, effectively ending years of deadlock in Parliament; but critics were also quick to say it would do little to help transform the German economy. Nearly half a decade later, what has the German energy tax reform achieved?

Macroeconomic balance

Between 1999 and 2003, Germany’s energy tax reform resulted in a gradual increase in energy costs. A number of exceptions motivated by social and economic considerations were initially included to safeguard the competitiveness of the manufacturing, agricultural and forestry sectors and to avoid undue hardship for lower-income households.

Overall, however, the fiscal burden resulting from the energy tax reform has been moderate compared to already existing taxes: for instance, only €0.15 of the €0.66 currently charged as taxes on every litre of gasoline is a result of the tax reform, with the far greater share originating in the excise taxes already imposed prior to 1999. Altogether, the share of environmentally motivated taxes in the overall tax revenue only rose from 5.2 per cent in 1998 to 6.5 per cent in 2003 and has since declined again to 5.3 per cent in 2008, nearly the level where it started in 1999.

Fossil fuel consumption has continually declined in Germany since the introduction of the energy tax reform. According to the German Federal Statistical Office, gasoline consumption in 2000 decreased by 4.5 per cent compared to the previous year and it continued to decrease in 2001 and 2002 by 3 and 3.3 per cent, respectively, exceeding the previous average reduction of 2 per cent due to general improvements in vehicle technology and transportation planning.

Reductions of CO2 emissions are estimated to have reached 3 per cent annually, equivalent to 24 million metric tonnes of CO2. At the same time, revenues of the energy tax reform have been almost fully returned to taxpayers, with the largest share used for a gradual reduction of social security contributions.

In 2003, for instance, roughly €16.1b raised through the tax reform was used to reduce and stabilise non-wage labour costs, allowing pension contributions to be lowered by 1.7 per cent. With hiring rendered less expensive, the energy tax reform has helped promote employment and has contributed to the creation of an estimated 250,000 new jobs. A smaller fraction of proceeds has been used to subsidise the deployment of renewable-energy projects and the modernisation of buildings.

Energy pricing

Like everywhere else, taxes are a politically sensitive issue in Germany. Given the complexities of its design, it was easy for critics to portray the tax reform as a mere increase in the fiscal burden, while downplaying or disputing the accompanying reduction in labour costs and expected employment benefits. Germany’s parliamentary system and its strict party discipline allowed the governing coalition at the time to pass the tax reform against partisan resistance.

Ironically, the need to close a growing budget deficit has made the current conservative government, previously an ardent adversary of environmentally motivated taxes, now dependent on the revenue created by the energy tax. As the rationale and benefits of the tax reform have become more widely known, there has been greater public acceptance of the incremental increase in energy cost. It stands to reason that better communication in the initial stages of the tax reform could have alleviated some of the early concerns. And clearly, a gradual and transparent trajectory of rate hikes was of central importance in making the tax reform acceptable in the first place.

Ultimately, however, the positive outcome of the tax reform is the most compelling lesson from the German experience: contrary to the early fears, behavioural change and innovation prompted by the rising energy prices have actually strengthened the German economy. Energy-efficient technologies are now among the fastest-growing export products and the incentive to reduce energy use has helped the German economy become more resilient to fluctuations in global oil and gas prices.

Overall, greater efficiency throughout the economy has translated into lower energy costs for households and industry. Despite significantly higher energy tax rates, average German utility bills and fuel expenditures tend to match or lie below those seen in the United States. As the Federal Environmental Agency has concluded, the Ecological Tax Reform Act delivered on its promise of improved labour conditions and greater sustainability, resulting in what the agency describes – in a typically German understatement – as a “positive macroeconomic balance”.

Promoting renewable energy

As a member state of the European Union (EU), Germany’s energy policies are driven by a mix of national and European legislation. Formally, the 27 EU member states regulate energy policies within their own national borders. However, EU treaty provisions concerning the European internal market, free competition and environmental protection have created a European energy policy.

In 2009, a major piece of renewable-energy legislation was passed as part of an overall climate and energy package. The European Union’s Renewable Energy Directive requires each member state to increase its share of renewable energy – such as solar, wind power, biomass or hydroelectric – to raise the overall share from 8.5 per cent in 2010 to 20 per cent by 2020 across all sectors.

Germany has seen a remarkable expansion of renewable energy in the last decade. The share of renewable energy in electricity generation rose from 6 per cent in 2000 to 16 per cent in 2009. Over this time, the German government revised its own targets twice, given that previous targets had been exceeded ahead of schedule. The German government is expecting a share of 38 per cent renewable power by 2020 and continues to drive the transformation “towards an energy system based completely on renewable energies”.

The economic benefits of this development are impressive. By 2010, the field of renewable energy related jobs employed around 340,000 people, most of them in biomass, wind power and solar.In comparison, the German lignite industry employs only 50,000 people – from mining to the power plant. The key policy responsible for this success is the Renewable Energy Sources Act, first enacted in April 2000.

US’ renewable energy practice

The US currently employs a mix of short-term tax credits, loan guarantees, state-level renewable portfolio standards and limited feed-in tariffs. In contrast to Germany, the US policy framework has evolved less quickly at the federal level, where time horizons have been shorter-term. The uncertainty engendered by this short-term policy framework has led to repeated falloffs in renewable energy capacity additions in the US as support measures have neared expiration.

In contrast to Germany, new wind turbine construction in the US has fluctuated greatly from year to year, because incentives have repeatedly expired. Even with this policy uncertainty, however, the US in 2008 still led the world in total installed wind-power capacity, with 20.8 per cent. In 2008, renewable energy provided 9 per cent of electricity production in the US, with large-scale hydropower being the largest source.

In many ways, the US relies more on a state-level approach through renewable portfolio standards to increase renewable energy capacity. Currently, renewable portfolio standards regulations apply in 29 states and in the District of Columbia; five additional states have established targets for renewable expansion. In many cases, long-term supply contracts for green power have been signed. Typical target percentages for green power are 15 per cent for 2015, 20 per cent for 2020, and 25 per cent for 2025. These figures are significantly lower than the target set in Europe (21 per cent for 2010).

Feed-in tariff policies, the most common renewable-energy policy in the world, are slowly spreading in the US. In most cases, these policies guarantee grid access and a 20-year premium contract for renewable energy technologies. As of January 2011, Gainesville Regional Utilities, Hawaii, and Vermont have adopted feed-in tariff policies based on the cost of generation. Maine and California have also adopted a light version of a feed-in tariff, though in California legal struggles are being fought. In addition, representatives in 10 different state legislatures have proposed different feed-in tariff models.

Energy tariff

The German success in rapid renewable energy deployment relies on a robust feed-in tariff law and an overall comprehensive climate and energy framework with a long-term perspective. This policy environment comes with streamlined administrative procedures that help shorten lead times and bureaucratic overhead and that minimise project costs. All of the above create a high investment certainty that the US overall and most of its states independently currently lack.

Given the abundance of natural resources in the US, the deployment of renewable energy should be cheaper than in Germany, which has an average solar input close to that of Alaska (and Iowa’s cornfields alone, which could be used for biogas production, are double the size of Germany’s agricultural land).

Across the political spectrum, all major German parties support an industrial transformation toward a low-carbon economy, and there is a strong consensus concerning the need to address climate change. Constituent groups from both the progressive – renewable energy industry – and conservative side – farming community – benefit from this approach. The understanding is that strong environmental policies drive ecological modernisation and create new market opportunities.

Germany as an export-oriented country aims to sell the solutions to a carbon-constrained and high-energy-price world. By contrast, the US lags behind, where political debates over climate change related policy actions are hindering opportunities and leadership in this arena. As long as the public perceives a trade-off between environmental regulation and industrial competitiveness, it will be extremely difficult for the US to fundamentally turn toward a low-carbon economy. US policymakers should adjust elements of a feed-in tariff policy to regional contexts to drive rapid growth in renewable electricity markets, to promote strong manufacturing industries, and to create new jobs in a cost-effective manner.

Green infrastructure

Over the past 40 years, northern Europe, and Germany in particular, has been a hotbed for the innovation and application of green technologies to enhance the urban environment. These technologies, sometimes referred to as green infrastructure or low-impact development, include such innovations as green roofs, green facades and permeable pavements. They mimic the natural processes of soils and vegetation to provide “environmental services” such as stormwater management, urban heat island amelioration and habitat, even in dense urban areas.

What is clear is that the proliferation of green roofs and other green infrastructure in Germany has been supported by a complex assortment of incentives and requirements at multiple levels of government. Significantly, federal nature-protection laws and building codes require “compensation” or restoration, for human impairment of natural landscapes and of environmental services in greenfield developments (development on previously undeveloped land).

Federal laws also require that German states create landscape plans. As a result, German states have innovated a variety of approaches to environmental protection, many of which have involved elements that first incentivised and later required the creation and maintenance of green infrastructure.

In addition to this, a series of German federal and state court rulings beginning in the 1970s have required increased transparency and equitable rate structures for stormwater services. As a result, the majority of German households are charged for stormwater services based on an estimate of the stormwater burden generated from their properties. This approach of individual parcel assessments (IPAs) differs from the approach used in the US, where the same charges are levied on all parcels or all parcels of the same class (such as residential).

While there is interest in the multiple benefits of green infrastructure in the US, green infrastructure techniques have gained recent attention in relation to stormwater management. Federal Clean Water Act programmes require that local governments overhaul stormwater management strategies to protect and improve surface water quality. The Metropolitan Water Reclamation District of Greater Chicago, for instance, has already invested $3.1bn in a multi-phase tunnel and reservoir plan to improve stormwater management. To raise needed funds, the creation of stormwater utilities and the assessment of stormwater fees are becoming increasingly widespread. To date, however, the vast majority of US cities have chosen to assess stormwater fees on a class basis; they assess the same fee to all parcels within a given class based on the average stormwater burden their property type contributes.

Stormwater management

While the US has focused attention on green infrastructure in relation to stormwater, most US municipalities currently lack the kind of overlapping, reinforcing incentives and requirements that have led to the prominence of these techniques in Germany. This is particularly important given the multiple benefits provided by green infrastructure – such as stormwater management, air-quality improvements and enhancement of urban quality of life.

Focusing on stormwater management specifically, however, there are further lessons that the US could draw from German experience with parcel level assessments or IPAs. Specifically, this approach might improve watershed planning and stormwater management and address the public relations needs of cash-strapped water management authorities in three ways: (1) data from IPAs could increase public awareness of human impacts on watersheds; (2) this detailed information could inform watershed planning; and (3) this data could be the basis of fee systems designed to create incentives for on-site stormwater management where cost effective.

In Berlin, public participation in assessing IPAs is credited with helping the public understand the connections between land-use decisions on their own property and environmental problems in local lakes and rivers. IPAs also provide detailed spatial information about impervious surfaces and their connectedness to the storm sewer system. The latter can only be assessed through on-site surveys, and thus it is otherwise rarely available to engineers and planners. Since connected impervious surface coverage is such a key variable in estimating stormwater burden, this information could enhance watershed planning and the development of stormwater models designed to optimise the efficiency of existing systems.

Ascertaining each property’s share of the stormwater burden effectively turns what is a diffuse, non-point pollution source into a point-source problem. Such a fee-assessment system makes it possible to reduce fees for parcels that manage stormwater with green infrastructure or other best practices. IPAs could, therefore, create a foundation for economic incentives, such as a fee-and-subsidy system or emissions trading, to encourage green infrastructure where it can cost-effectively manage stormwater.A significant obstacle to this in the US is the low rate currently charged for stormwater removal. It could prove politically and legally difficult for U.S. stormwater utilities to charge fees high enough to serve as incentives for on-site stormwater management.

Sustainable transportation

Governments at federal, state and local levels in Germany determine the sustainability of the transportation system. Federal gasoline taxes, sales taxes and regulations make automobile use and ownership expensive and encourage demand for less polluting and smaller cars. In 2008, sales taxes on automobiles in Germany were three times higher than in the United States, and gasoline taxes were nine times higher.

However, higher gasoline taxes do not translate to higher household expenditures for transportation in Germany compared to the US. Germans own fewer and more energy efficient cars and drive fewer miles than Americans. Thus, in 2008 transportation accounted for roughly 14 per cent of household expenditures in Germany, compared to about 19 per cent in the US.

The German federal government provides dedicated matching funds for investments in local public transportation. Flexible federal matching funds for local transportation improvements can also be used for local public transportation, walking, and cycling projects.

German states distribute federal funds for regional rail systems and coordinate public transportation services statewide. Many German states set minimum parking requirements for local developments. Federal and state governments provide the framework for more-sustainable transportation, but cities have played a crucial role in developing and implementing innovative policies.

Implementing policies

Implementing German-style policies in the US requires careful consideration of the political, cultural and institutional context. For example, legal and political barriers could hamper a transfer of German policies to the US. First, start small and implement policies in stages. Many sustainability policies in Germany were first implemented at a small geographic scale or with a small scope and were expanded in stages over time. Small-scale pilot projects allow policymakers to experiment and the public to experience a real-life example of the proposed programme. Unsuccessful projects can be discontinued and successful programmes can be expanded.

Another aspect of staged implementation is political acceptability. For example, the German Ecological Tax Reform Act, which increased taxation on energy to reduce social security taxes, was implemented in stages, with taxes increasing annually over a period of five years. Similarly, many policies encouraging green infrastructure on private properties began as financial incentives and only later were replaced by requirements, once there was greater acceptance and experience with these techniques.

Second, policies should be coordinated across sectors and levels of government to achieve maximum effectiveness. Despite the high public visibility of flagship projects like the Ecological Tax Reform Act, no silver bullet has proven to be the single factor for successful results. For example, in transportation, the German federal government increased taxation on gasoline, while local governments improved conditions for walking, cycling and public transportation – thus offering a viable alternative to the car. This approach increased political acceptability with the public, since drivers had a choice to continue driving at higher cost or to shift modes of transportation. In Germany, green infrastructure has been incentivised and in some cases required by a suite of overlapping programmes.

Third, foster citizen participation and communicate policies effectively. Policies that affect people’s everyday lives have to be developed with active citizen participation. Citizen input reduces potential legal challenges, increases public acceptance and has the potential to improve projects and outcomes. Public participation in assessing parcel-level charges and new stormwater fees in Berlin helped the public to understand how their properties contribute to environmental problems. The public sector has to effectively communicate the intentions of policy.

Fourth, find innovative solutions and embrace bipartisanship. The implementation of several of the highlighted policies came with strong political controversy in Germany. However, the policies survived because, over time, parties across the political spectrum benefited from them or could not afford reversing them.

Ralph Buehler is Assistant Professor in urban affairs and planning at Virginia Tech.

Arne Jungjohann is Director for the Environment and Global Dialogue Program of the Heinrich Böll Foundation in Washington, DC.

Melissa Keeley is Assistant Professor in geography and public policy and public administration at George Washington University.

Michael Mehling is President of the Ecologic Institute; Adjunct Professor at Georgetown University.

A version of this article first appeared on Solutions Journal.

The views expressed in this article are the authors’ own and do not necessarily represent Al Jazeera’s editorial policy.