Green VAT proposal likely to be scrapped


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.

John Hontelez, secretary-general of the European Environmental Bureau, said that the Commission's concerns were misguided. "Consider the reduced VAT schemes as a direct contribution to a more realistic and real domestic greenhouse gas reduction perspective. Contrary to the consultants, who think that a VAT reduction on energy efficient products will not lead to reduced emissions in the EU but only a lower energy price (because of the cap achieved with the emission trading system), the EEB believes that VAT reduction can lead to more emission reductions in the EU: increased energy efficiency can indeed lower the price of carbon emissions in the sectors under the Emission Trading Scheme (in particular the electricity producing sector)," he argued in a letter to commissioners.

Alisdair Gray, the British Retail Consortium's Brussels director, said: "Reducing emissions is not just about homes. It's about the equipment in them. The UK is in recession. Price is an even more important factor in customers' buying decisions. Retailers are doing a great deal. They need and deserve help to achieve more. By cutting VAT on 'greener' household goods, the Commission will show it is matching rhetoric with policy."

Current EU rules on value-added tax (VAT), set out in the 2006 VAT Directive, specify that member states must subject supplies of goods and services to a rate of at least 15%. 

However, they also allow countries to apply reduced rates as low as 5% in a broad range of areas deemed essential, like medicines or labour-intensive services, including renovation of private dwellings, cleaning and hairdressing (EURACTIV 27/07/06).

Indeed, social considerations rather than 'green' objectives have traditionally driven the selection of items on the list, such as reduced rates for energy consumption to ensure that poorer households have access to energy, leading some member states to oppose the plans.

Consequently, in July 2007, the Commission made a renewed attempt to overhaul the bloc's VAT policies to allow governments to apply reduced rates for a greater number of labour-intensive services, such as haircuts, house cleaning and renovation, vehicle repairs and catering in restaurants, excluding environmentally-friendly products at that point (EURACTIV 23/07/07). 

Opposition from some member states continued, however, leading the EU executive to try again last summer (EURACTIV 8/07/08).

  • April 2009: Commission to put forward 'green taxation' package.

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