Ground won for VAT cuts for greener products

Gordon Brown has secured a commitment from the European Commission that it will consider VAT reductions for "energy-efficient and energy-saving materials".

EU nations will consider an Anglo-French proposal to cut value-added tax (VAT) for energy-efficient goods and energy-saving materials such as light bulbs, fridges, washing machines and insulation.

The European Commission has been asked to "examine areas where economic instruments can have a role to play to increase the use of energy-efficient goods and energy-saving materials", after a European Council meeting in Brussels mid-March.1 Prime Minister Gordon Brown and French President Nicolas Sarkozy sent a letter to the EU President on 13 March calling on the Commission to include provisions for reduced VAT rates this summer, in time for the planned adoption of VAT legislative proposals during the French Presidency.2

Gordon Brown has been lobbying EU member states for nearly a year to consider the idea, which he believes could stimulate innovation in the market and act as an incentive to buyers. Several member states are unenthusiastic and may not be persuaded.

In March 2007, he confirmed he would write to EU finance ministers on the matter (ENDS Report 386, pp 6-7 ). Four months later he garnered support from Sarkozy (ENDS Report 391, p 55 ).

At a press conference following the Brussels’ meeting, Gordon Brown said he thought "people have been persuaded by the argument that we should look at this very carefully".

While environmental groups and businesses would welcome this green VAT reform, some want it to go further. In particular, they want VAT rates lowered for the refurbishment of old buildings, which can greatly improve their energy efficiency. New buildings are VAT-free while refurbishment work attracts the full 17.5% rate.

The development comes as the debate on the potential of green fiscal sharpens in the UK.

This month the Environmental Audit Committee called on the Treasury to respond to climate change "on the scale and with the urgency recommended in the Stern review" (pp 56-57). In January a Green Fiscal Commission was launched with cross-party support to "prepare the ground for green fiscal reform" (ENDS Report 397, p 54 ).

Soon after, Green Alliance called for a much broader approach to green taxation to become the focus of debate rather than the current focus on reducing taxes on climate-beneficial products.3 The think-tank’s most radical proposition is to replace VAT with an environmental tax graduated according to how environmentally damaging or beneficial products are with exemptions for the "best". Alternatively, it suggests focusing on particular classes of products or materials with the greatest impacts. Criteria used to select products or materials could include:

  • Products that end up as a significant waste stream that is difficult to recover or recycle
  • Products containing materials are or might soon be scarce
  • Products where component materials have an unacceptable ecological burden
  • Products that do not take advantage of innovations in energy and water efficiency
  • Products with poor durability or built-in obsolescence
  • Products that require energy when their predecessors did not

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