“Agricultural Diesel Subsidy Creates Wrong Incentives”

During the public hearing in the Finance Committee of the German Bundestag on 15 January 2024, the preferential treatment in agricultural diesel and vehicle tax for forestry and agriculture were under discussion. Friedrich Heinemann, head of the “Corporate Taxation and Public Finance” Unit at ZEW Mannheim and professor at Heidelberg University, presented his position in the committee, stating:

“The agricultural diesel subsidy was introduced in 1951 to ensure the competitiveness of German agriculture. This measure costs the federal government 440 million euros annually. The exclusive promotion of agricultural diesel creates incentives for increased consumption in agricultural production, thus encouraging an energy-intensive and environmentally harmful production method. Farmers already have ways to lower diesel consumption, e.g. when selecting crops, the type of sowing and soil cultivation, in their plant protection concept and by taking diesel consumption into account when purchasing machinery. The agricultural diesel subsidy has the effect that these adjustment options are not sufficiently exploited.

Furthermore, the agricultural diesel subsidy reduces incentives for manufacturers of agricultural machinery to offer more fuel-efficient machines or to advance innovations towards hybrid and alternative drive systems. Subsidising a fossil fuel has become an anachronism that is economically outdated. A gradual phase-out will not overwhelm farmers, given the low share spent on fuel in the overall costs. Removing the subsidy or reforming it to make it more efficient and environmentally friendly is therefore a logical step.

It is disappointing that the political decision to abandon the vehicle tax exemption has already been made. This subsidy was introduced a century ago to advance the mechanisation of agriculture, a goal that has long been achieved. In future, agricultural subsidies should focus more on climate protection, biodiversity, and animal welfare. This shift should take place in close coordination throughout Europe, as is envisaged in the EU’s common agricultural policy through new eco-schemes. By reorienting subsidies in this way, both the agricultural diesel subsidy and the tax exemption for agricultural machinery no longer have a raison d'être.”