The European Commission is poised to put forward proposals for a 'green tax' in early April, but reduced value-added tax (VAT) rates to promote green products are unlikely to feature as part of the package.

The legislative proposals will modify existing EU laws on taxation of energy products. They will be accompanied by a Commission communication and a staff working document on the role of taxes in energy and environmental policy.

The package also includes a draft law to amend the 2006 VAT Directive, with view to cutting value-added tax (VAT) on some environmentally-friendly goods, including energy efficient light bulbs and insulation.

EU heads of state and government called for green VAT to be considered at a summit in March 2008, under pressure from French President Nicolas Sarkozy and UK Prime Minister Gordon Brown (EurActiv 17/03/08).

Recent reports nevertheless suggest that the Commission might decide against proposing such reduced VAT rates. The concerns expressed reflect a consultants' report, submitted to the tax department in December, citing negative cross-border effects and higher energy demands.

The European Environmental Bureau criticised the Commission for contradicting itself. It noted that the EU executive's economic recovery plan of November 2008 clearly stated that the Commission would propose reduced VAT rates for green products and services, "aimed at improving in particular energy efficiency of buildings".

The package, drafted by the Commission's tax department, appears to have had a rough passage through internal consultation in other departments. According to an EU official, some departments are likely to want to add their priorities to the proposal. For example, the energy department will probably try to include products such as boilers, while biofuels are a 'must' for the agriculture department, ENDS reported.

The legislative package is still at a drafting stage and details of its exact content are yet to emerge. The Commission is waiting to see what happens during discussions between economy and finance ministers on 10 March.

Bulk of member states object 

But member states are not expected to endorse an eventual proposal on green VAT cuts. According to a draft political agreement for next week's Ecofin Council, "more efficient tools and measures than reduced VAT rates for specific goods and services exits for achieving environmental policy objectives and are therefore to be preferred".

A Council official told EurActiv that many member states have "substantial reservations" on whether the scheme can play a significant role in promoting green products and ultimately the EU's climate goals. Germany, Austria and Denmark are clearly against the proposals, and the Baltic states have expressed concerns too.

The UK and France thus appear to be exceptions in supporting VAT reductions for environmentally-friendly products. France has also been lobbying hard for lower VAT rates for labour-intensive industries, with an eye on its catering sector. The Commission's proposals on this front will also be discussed by the Ecofin Council next week.