Reduced VAT for environmentally friendly products will not unambiguously lead to energy savings and reduced greenhouse gas emissions. Generally, the best approach to reduce GHG emissions is to tax at the root. The real question, therefore, is whether supplementary action, such as providing subsidies to the most energy efficient variant of a specific product, is able to reduce the cost of CO2 abatement beyond what the EU ETS offers. A lower VAT rate is a crude subsidy and may also lead to compliance problems in the real world. Furthermore, a lot of the products considered for lower VAT rates, such as freezers, have “cross-border trade potential” because they are relatively expensive. Finally, reduced VAT may not be the most cost-effective instrument to address adverse distributional impacts of higher energy and food prices.
Copenhagen Economics has studied the potential use of reduced VAT on environmentally friendly goods and the current application of reduced VAT on energy consumption by households. The study is based on our 2007 study for the Commission which contributed to a Communication on the effects of differentiated VAT rates to the Council and the European Parliament.
Read the report here
For more information please contact Sigurd Næss-Schmidt