EU member states have sent their finance ministers to Brussels today (13 November) to discuss a proposal, first tabled by Britain and France in July, to reduce Value Added Tax (VAT) rates on certain environmentally friendly goods.
Current EU VAT rules, spelled out in the 2006 VAT Directive, allow for reduced rates for energy consumption in order to give poorer households access to energy. The rules also allow for reduced rates for a variety of goods and services, but ‘green’ considerations have traditionally not driven the selection of items on the list.
In July, France and Britain announced their support for an extension of the reduced VAT list to products such as energy efficient light bulbs and insulation materials.
While the support of France and Britain, which has been traditionally opposed to new tax laws originating in Brussels, may give a boost to the measure, reducing or harmonising VAT rates across the EU is difficult since the unanimous backing of all 27 EU member states is required.
The Commission 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 EU executive said in a 5 July press release.
There may also be additional hurdles apart from political considerations, such as the potentially contentious issue of selecting which products are to be included in the list. “The problem is that technology evolves so fast that what is energy-efficient today won’t be tomorrow. A static list of products won’t work”, according to one German government official, quoted in the International Herald Tribune (IHT).
The European Renewable Energy Council (EREC) argues nonetheless that renewables and energy efficient technologies must be added to the list on the grounds that the current rules create a “perverse incentive in favour of energy consumption, which conflicts with the goals of the EU in terms of energy and environmental policy”, EREC’s Policy Director Oliver Schäfer said in a 12 November press release.
France intends to push for agreement on the VAT issue during its presidency of the EU from July to December 2008, according to the IHT, which reported on 1 November that France may also push for penalties on imports from countries with high pollution levels, such as China.