EC Publishes Studies On Environmental Taxation

by Ulrika Lomas, Tax-News.com, Brussels

26 January 2009

The European Commission has published two studies examining how reduced value-added tax rates and direct company tax incentives could encourage the purchase of environmentally-friendly goods by consumers and the manufacture of energy-efficient products by businesses.

The VAT study examines the potential use of reduced VAT on environmentally friendly goods and the current application of reduced VAT on energy consumption by households.

The analysis was carried out in the context of the EU's policy approach to climate change and energy security, including interaction with other policy instruments at the EU and national levels. The core of the study focuses on what role, if any, should VAT rate policy play in underpinning these objectives.

The study concluded: "Generally, we believe that the best approach to reducing greenhouse gas emissions is to tax at root. Putting a proper price on the emissions of, for example CO2 emissions and thereby also energy use, will give consumers and industries incentives to reduce them. The EU Emissions Trading Scheme (ETS) is a prime example of this; indeed emissions of CO2 from nearly all electricity consumption and district heating by households are already covered by the ETS."

"So any new measures encouraging lower electricity use by households will lead to a lower price of ETS emission allowances but will leave the level of CO2 emissions unchanged: the level of emissions is determined exclusively by the number of allowances allocated."

The second study examines the costs and benefits of direct tax incentives (subsidies and tax credits in income taxation) to promote the use and manufacturing of energy-efficient appliances. This was done for four products with high energy-saving potential: refrigerators, washing machines, boilers and compact fluorescent lamps.

The data from four different member states (Denmark, France, Italy and Poland) was used in the analysis. In addition, the study examined: the current market situation concerning the four products in question; the use of direct tax incentives in the EU and the US and; economic studies on the effectiveness of tax and incentive instruments.

This study concluded that the use of incentives to promote the use of energy-efficient appliances "can be cost effective." The effectiveness of such measures will depend on the particular product, the member state, the market conditions, and the design of the policy instrument. However, the study found that on the whole, energy tax policies are a more effective means of encouraging the production of energy-efficient appliances than subsidies.

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