German economy minister calls for controversial VAT cut on fuel

German economy minister Katherina Reiche has proposed new tax breaks on petrol and diesel to soften the blow from record fuel prices on motorists, a measure critics say would stir demand for scarce oil, slow the transition to e-mobility, and fail to target people most in need.

Only four days before two state elections where the right-wing Alternative for Germany (AfD) is expected to see strong gains, Reiche said on the sidelines of the G20 energy ministers meeting in Houston that the value added tax on fuels should temporarily be cut from 19 to 7 percent, reported public broadcaster ARD's Tagesschau. 

"Such a cut could take effect where the burden is felt most directly – right at the pump," Reiche said.

Conservative chancellor Friedrich Merz pledged relief for high fuel prices earlier this week, but didn’t say how his government wanted to implement it. The question of how to support citizens and companies that struggle with rising petrol and diesel prices due to international crises – while ensuring the transition away from the climate-damaging fossil fuels – has occupied the government for years.

Reiche rejected a cap on fuel prices and a windfall tax on energy companies, which the Social Democrats (SPD) – who govern in a coalition with Reiche’s conservatives – proposed to help citizens with record fuel prices as a result of the Iran war. The government would also consider additional targeted support for logistics companies that would not benefit from this form of tax cut, Reiche said. She also pointed to a new mechanism to allow direct payments to low-income households, which she said should be ready early next year.

Environmental transport organisation VCD said the government should stop pouring billions into short-lived fuel discounts and instead make public transport cheaper. "Instead of further expensive measures with no lasting effect, we need solutions that reduce dependence on fossil fuels," VCD head Christiane Rohleder said. A cheaper Deutschlandticket – Germany's nationwide public transport pass – motorway speed limits, and support for buying used electric cars would bring more lasting relief, the organisation argued.

Earlier this year, the German government already lowered fuel tax rates by 17 cents a litre for two months – a measure that cost the state around 1.6 billion euros. But critics slammed the scheme for failing to help those truly in need, and for doing little to reduce the country's fossil fuel dependence.

The fuel price spike means that the cost advantage of driving an electric car is larger than ever, according to price comparison website Verivox. “Anyone who charges a mid-range or premium electric car at home currently has running costs that are around 70 percent lower than with a petrol car and around 56 percent lower than with a diesel car,” Verivox said.