Global Economics

Is Germany Taxing Biodiesel to Death?


Last year, the environmentally-friendly fuel lost tax-exempt status. In January the surcharge will go up again. Critics call it irresponsible

The smell seems out of place here in Piesteritz. Once a major hub of East Germany's powerful chemical industry with fully 20,000 workers, the site is now enveloped in a pungent odor more reminiscent of a brewery than the sulfuric acid and ammonia locals were used to whiffing during the Cold War. "You smell that?" plant manager Rainer Mahn shouts over the roaring machinery. "That's the smell of money."

In fact -- to be painfully accurate -- it's the smell of rapeseed oil, crushed from truckloads of fresh rapeseed brought from farms throughout the region. By the time the translucent gold liquid reaches the other end of the factory it will be a viable fuel. This brand-new factory built by Neckermann Renewables can produce 220,000 tons of biodiesel per year.

Germany's biodiesel market -- the world's largest -- is in upheaval. Last autumn, the infant industry lost its tax-free status, meaning that every liter of biodiesel produced here became nine euro cents more expensive. The results were instant: stock prices plunged; trucking companies that had been filling their tanks with climate-friendly biodiesel switched back to fossil fuels; and a number of smaller biofuel refineries had to close their doors.

While rising crude prices this summer have helped, many producers fear that the next tax bump in January, up to 15 cents per liter -- part of a five-year plan to equalize biodiesel tax with the 45 cents the state skims off every liter of conventional diesel sold -- will result in yet more suffering.

"Biodiesel is the only established way to reduce carbon dioxide emissions and it is also free of sulfur, damn it!" fumes Dieter Heisig, president of Neckermann Renewables parent Global Alternative Energy Germany GmbH (GATE). "The tax is irresponsible and it goes against everything that (Chancellor Angela Merkel) says and wants. If the next level is introduced, that would be deadly."

It's a point of view that the politicos in Berlin understand. Sort of. Earlier this month, a working paper was introduced by the Social Democrats (SPD) calling for the 2006 biodiesel tax plan to be re-examined. Were current negotiations with Merkel's Christian Democrats to be successful, the tax's effect on the industry would be looked at each year before the next level became law.

The proposal also contains a clause that could be even more attractive to biodiesel producers. Concurrently with last year's tax, a law was introduced requiring every liter of diesel sold in Germany to include 5 percent biodiesel, essentially guaranteeing a market for the stuff. The SPD wants that upped to 7 percent.

Tax Won't Disappear

"We have a production capacity in Germany that is much bigger than the market, meaning there is a lot of fuel in storage," Reinhard Schultz, a finance expert for the SPD in parliament and a co-signer of the working paper, told SPIEGEL ONLINE. "That's why we want to raise the quota faster than originally planned." But Schultz also said the tax was not going to disappear.

Germany's Environment Minister Sigmar Gabriel, likewise from the SPD, also got into the act saying at a recent party conference on energy policy that the government was aware of the problems caused in the biodiesel industry by the new tax. He promised that action would be taken following the parliament's summer break. Biodiesel stocks began climbing as a result.

When seen from a distance, Germany's biodiesel sector has so far been an uninterrupted success story. After a decade of low-level growth in the 1990s, production has boomed since the turn of the millenium: The amount of biodiesel produced in 2006 is eighteen times the volume produced in 2000 (over 4.5 million tons, up from 250,000). At the same time, the amount of rapeseed planted -- the crop Germany prefers as a basis for its biodiesel -- has skyrocketed. Germany's €2 billion biodiesel industry produces more than five times as much eco-fuel as Italy, its next biggest competitor in Europe.

The boom has also dovetailed nicely with Germany's growing focus on climate change: Biodiesel emissions are some 50 percent lower than diesel made from fossil fuels, according to the International Energy Agency.

Not as Much Oomph

But according to industry insiders, a fundamental problem with the market remains. The 5 percent rule finds a home for some 1.5 million tons of biodiesel a year. Production capacity, however, is 4.5 million tons a year and climbing. "The biodiesel branch is dependent on a functioning B100 market (shorthand for the biodiesel sold at fuel stations)," Petra Sprick, director of the Association of the German Biofuel Industry, told SPIEGEL ONLINE.

The difficulty, the industry complains, is that biodiesel, to be attractive at the pumps, needs to be roughly 10 cents a liter cheaper than conventional diesel. Biodiesel motors use more oil and change their filters more frequently -- at least at first -- which raises costs. Biodiesel also has slightly less oomph (read: energy content) than traditional diesel, meaning cars and trucks tend to use more on any given trip. When biodiesel prices this spring rose to within three cents of its fossil-fuel cousin, a number of trucking companies that had been using eco-fuel switched back.

This is exactly what Germany, given the country's self-anointment as the global climate's knight in shining armor, would seem anxious to avoid. Only this spring, Merkel -- then holder of the European Union's rotating presidency -- pushed through a European Union plan to cut the continent's CO2 emissions by 20 percent by 2020 compared with 1990 levels. More to the point, the plan calls for 10 percent of European cars and trucks to run on biofuels by then.

"Finance Minister Peer Steinbrück saw an opportunity, saw the booming biodiesel market, and decided to wring some money out of it," Claus Sauter, CEO of biodiesel manufacturer Verbio AG, told SPIEGEL ONLINE in reference to the disputed tax. "But it is totally counterproductive. Biofuels represent a great future market for Germany -- and it benefits thousands of people from farmers to factory workers."

Sauter's bitterness is not difficult to understand. Just months after taking his company public last fall, the tax took hold. Verbio stock went into freefall, losing almost 60 percent of its value within weeks.

The Bull and the China Shop

Nevertheless, after a day with Dieter Heisig from Neckermann Renewables, it's difficult to completely disregard a frequently-repeated refrain from politicians that Germany's biodiesel industry is exaggerating its woes. The former Hollywood film producer -- who used to hang out with the likes of Orson Welles and Mick Jagger -- seems to have difficulty getting worked up about the biodiesel tax, preferring instead to gush about Neckermann's new, €80 million factory in Piesteritz, just outside the town of Wittenberg where Martin Luther kicked off the Reformation in 1517.

He talks enthusiastically about biodiesel by-products, including the 20,000 tons of kosher-certified pharmaglycerin (a chemical used in cosmetics) his new factory will churn out every year. He reminisces almost nostalgically about the difficulties faced by his company's first biodiesel filling station: "We opened up, and then nobody came." And he coyly pleads ignorance when asked about the downsides of biodiesel: "I'm sure there are some, but I honestly can't think of any at the moment."

With politicians in Berlin demonstrating a willingness to revisit last autumn's tax law, Heisig's equanimity is perhaps not surprising. The biodiesel industry in Germany may be just one parliamentary vote away from its next big boom.

Not everyone is so sanguine, however. "The problem is," says Sprick from the Association of the German Biofuel Industry, "we don't trust the politicians. Talk is cheap. Who knows when they'll let the next bull loose in the china shop?"


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