Germany to slash VAT on gas sales to cushion price shock

Germany has unveiled plans to cut tax on natural gas sales to soften the blow of soaring energy costs for many households by offsetting the impact of a new gas levy that starts in October.

Chancellor Olaf Scholz announced the cut in value added tax on gas sales from 19 per cent to 7 per cent on Thursday, telling reporters that more measures would be announced in the coming weeks to deal with Germany’s mounting energy crisis.

“The question of justice is crucial for the country to stick together in this crisis,” Scholz said, adding that gas suppliers should pass on the tax cut in full to their customers. “You’ll never walk alone,” he said, repeating his often-used mantra.

The move will lower energy costs for German households and reduce inflationary pressures in the economy, but it is also likely to dilute the incentive provided by higher prices to reduce consumption.

German authorities aim to cut total gas usage by a fifth this year to avoid having to ration supplies for heavy industrial users if Russia keeps throttling its gas flows to Europe.

“Reducing VAT on gas prices is really counterproductive,” said Klaus Adam, economics professor at the University of Mannheim. “It’s never a good idea to mess with the price mechanism. It’s better to subsidise in a targeted fashion and according to need with lump sum transfers.”

The VAT cut will come into effect in October and offset the impact of an extra levy starting at the same time that was announced earlier this week and will add 2.419 cents per kWh to gas bills to compensate suppliers for sharply higher wholesale prices.

Jörg Krämer, chief economist at German lender Commerzbank, estimated the move would reduce German inflation by 0.3 percentage points.

“This announcement sounds a bit like a desperate move,” said Carsten Brzeski, head of macro research at Dutch bank ING. “Prices have increased by so much that it is no longer about incentives to reduce gas but rather about how households can actually still pay their energy invoice in the winter.”

Analysts at Germany’s Deutsche Bank estimated in a blog on Thursday — before the VAT cut announcement — that the new levy would cost industrial groups €5bn extra per year.

The chemicals industry, one of Germany’s biggest consumers of gas, complained that it would not benefit from the VAT cut, adding that Berlin had increased its burden with extra gas levies on Thursday. “Companies don’t pay VAT, so the relief doesn’t do them any good,” said Wolfgang Grosse Entrup, head of the country’s chemical industry association.

Roughly half of all German households rely on gas for heating and the government has estimated that the new levy would cost an extra €484 a year — excluding VAT — for the average family of four with an annual gas consumption of 20,000 per kWh.

Germany relies heavily on Russian gas, which until Moscow’s full-scale invasion of Ukraine accounted for 55 per cent of its gas imports. But Russia has cut flows through the Nord Stream 1 pipeline, the main conduit for delivery of gas to Europe, to only 20 per cent of capacity.

Wholesale European gas prices have surged to €225 per megawatt hour — nine times higher than the average level of recent years. This has driven a surge in electricity prices. German baseload power for delivery next year, the benchmark European price, rose more than 3 per cent to a record €511 per MWh on Thursday, according to the European Energy Exchange.

Several of the measures launched by Berlin in June to tackle the country’s energy crisis — such as a cut in fuel duty and a subsidised €9 monthly train ticket — are due to expire next month, which will increase the burden for households and businesses.