Tax Differentials for Catalytic Converters and Unleaded Gasoline in Germany

The Policy in Brief

Economic Instrument: Cash subsidies and grants and a tax repayment for catalytic converters, combined with taxes on leaded gasoline and cars without catalytic converters.

Problem: Air pollution from road traffic was hurting Germany's forests.

Goal: The reduction of vehicle emissions, including carbon monoxide, unburnt hydrocarbons and nitrogen oxides, and the acceptance of the catalytic converter as the new technical standard for passenger cars.

Description: A feebate scheme incorporating tax differentials favouring compliance with low emissions standards, tax exemptions on cars registered with catalytic converters, and cash incentives for retrofitting existing cars with catalytic converters.

Administering Institutions: German federal government and German Länder or states Key Stakeholders: German federal government, EU, car owners, and German Länder.

An Overview

Catalytic converters - which only run on unleaded fuel - have provided the German federal government with an opportunity to play a leadership role within the EU in lowering vehicle emissions.

Germany's transition to catalytic converters and unleaded gasoline required EU approval for both legal and practical reasons. Agreement was obtained with the Luxembourg Compromise of June 1985, clearing the way for the implementation of a number of program initiatives decided by the German federal government in the autumn of 1983. These included:

1) Tax differentials in favour of unleaded gasoline

In 1985, the federal government amended the Federal Act on the Taxation of Fuels and introduced tax differentials in favour of unleaded gasoline, starting from January 1, 1986. The initial tax differential was 0.04 DM per litre, but was subsequently raised to 0.10 DM per litre to provide an inducement great enough to change consumer behaviour. The German fuel tax accounts for roughly two-thirds of the price of gasoline, and the federal government receives the revenues of the fuel tax. Despite great success in the growth of the unleaded gasoline market - now on the order of 90% of all gasoline purchases for passenger vehicles - the differential has not been reduced. This induces car owners equipped with catalytic converters to stick with unleaded gasoline.

2) Tax incentives to promote catalytic converters

Car owners in Germany pay an annual tax under the Federal Act on the Taxation of Motor Vehicles of 1979. In order to promote catalytic converters, the federal government (a) introduced tax differentials for low and reduced emission vehicles, (b) exempted new cars equipped with catalytic converters from the car tax for a certain period of time. Although the tax is regulated by a Federal Act, it is the Länder which receive the tax revenues and administer the tax. This is done under a revenue-neutral framework.

3) Subsidy to convert older cars.

The government offered cash for retrofitting existing cars with catalytic converters.

The annual tax for passenger cars, calculated according to the capacity of the engine, was given an added wrinkle. From January 1, 1986, onward, cars were divided into one of three new tax sub-categories - for low, reduced and regular emissions. The comparatively high car tax on diesel-engined passenger cars was intended to offset the comparatively low fuel tax on diesel. Though diesel-engined cars require less fuel, they cause air pollution from soot particle emissions.

The most striking feature of the federal government's program on catalytic converters was the temporary exemption from the car tax granted to anyone registering a new, catalytic-converter-equipped car. Initially these exemptions were high - up to DM 3,000 per car - to encourage car owners to buy the new and expensive converters. The tax exemptions were necessary initially in order to persuade car owners to bear the larger, lump-sum costs of retrofitting their cars. With subsequent technological progress and economies of scale, however, the tax exemption eventually fell to DM 1,100 by January 1, 1988, and was abolished entirely in July 31, 1991 to reflect the fact that by then 97% of all newly registered cars had catalytic converters.

The third element of the federal government's program to promote catalytic converters consisted of direct cash payments to car owners who retrofitted existing cars with catalytic converters. This effectively made the program a 'feebate scheme', having both charge and rebate elements, during the period it operated between January 1, 1986 and July 31, 1992.

Some Further Reading

Federal Ministry of the Environment (ed.) (1993). Zehn Jahre Katalysator (Ten Years of Catalytic Converters), in Umwelt (BMU), Issue 10, pp. 402-403.

Haigh, Nigel (1992). Manual of Environmental Policy: The EC and Britain, Chapters 6.7 and 6.8, Longman, London.

Strodhoff, Bernhard (1993). Kraftfahrzeugsteuergesetz (Commentary on the Federal Car Tax Act), Luchterhand, Neuwied, Germany, loose-leaf binder.

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