In a bid to shield consumers from rising energy costs, the German federal government has announced it will ditch plans for a gas levy and instead spend up to 200 billion euros on a gas price cap. 

Gas levy out, gas price cap in

“Prices have to come down,” Chancellor Olaf Scholz told a press conference in Berlin on Thursday. He was joining via video, having recently tested positive for COVID. “That is our conviction… For them to come down, we will need a big defence shield.” He explained that the new 200-billion-euro relief package would include a gas price cap and a windfall tax on the huge profits being made by some energy companies. 

As was widely expected, the new approach means that the government will abandon plans for a gas levy, which would have seen an additional tariff of 2,419 cents per kilowatt hour added on to the price of gas. On Wednesday, responding to the spiralling electricity and gas prices that are redoubling pressure on consumers, Germany’s 16 federal states had urged the government to shelve plans for the levy and instead introduce a price cap. 

Scholz explained that the price cap would mean no extra financial burden for pensioners, workers, families and small businesses who are struggling with their bills. The money for the cap will come from the federal government’s economic stabilising fund, which was set up in 2020 to help support businesses during the coronavirus pandemic. 

German government promises VAT reduction and energy windfall tax

Exactly how the gas price cap will be implemented is as yet unclear. Federal Economics Minister Robert Habeck said that an expert commission would be appointed and would soon make a proposal, which could then be discussed and implemented by the government.

Ministers said at the press conference that the cap would bring prices down “to a level where private households and companies are protected from being overloaded.” The state will then make up the difference between the capped price and the prices paid by gas importers. 

It was also announced that the government will work to reduce the price of electricity with a new windfall tax. This would see companies profiting during the current crisis required to hand over a portion of their profits if they do not generate power. 

The government’s previous plan to reduce VAT on gas from 19 down to 7 percent, announced earlier this month, will go ahead as planned.