French President Nicolas Sarkozy and UK Prime Minister Gordon Brown announced on 20 July in Paris that they "will ask the British and French finance ministers to go to the Commission shortly to propose to our European partners that all ecologically clean products should benefit from a reduced rate of VAT".
"It is unfair that a polluting car costs less than a car that does not pollute," Sarkozy added.
The "green" products in question include cars with reduced CO2 emission, insulation materials, efficient light bulbs and energy-efficient appliances. The leaders are to propose a 5% EU-wide VAT rate for such products, a significant reduction from the UK's 17.5% and France's 19.6% VAT rates.
The Commission is in favour of greater harmonisation of VAT rates - it recently published a consultation on the issue (EurActiv 06/07/07) - and both the Commission's 28 March Green Paper on tax reform (EurActiv 29/03/07) and it's Integrated Product Policy (EurActiv 16/08/04) support the use of taxes as a tool for "greening" the EU economy.
But the reduction and/or harmonisation of VAT rates across the EU requires the unanimous backing of all 27 EU member states, and the European Parliament has only a consultative role in taxation matters.
The Commission also acknowledges that "the room for manoeuvre is narrow" with respect to variable reduced VAT rates in the EU, as there is a risk for distortions in the internal market. "Political input is required here to determine what distortions can be deemed acceptable," the Commission announced in a 5 July press release.
There are also concerns that reduced rates for green products within the EU could distort trade with developing countries, particularly with respect to the import of biofuels.
The Commission is due to put forward proposals on unified VAT rates in early 2009.