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Brown And Sarkozy Press Ahead With Green VAT Plan

by Ulrika Lomas,, Brussels

03 August 2007

It has been reported that the British and French governments are progressing with a joint initiative seeking to change the European Union VAT rules to reduce tax on purchases of goods which are considered energy efficient.

According to a report in the Financial Times on Wednesday, the two governments are currently developing the detail of the plan and will announce their proposal next month.

"We are trying to use indirect taxation as a way of encouraging environmentally responsible behaviour," a UK government official was quoted as saying by the paper.

The idea behind the plan is to encourage the manufacture of more energy efficient products that will ultimately reduce carbon emissions, especially white goods such as fridges, freezers and washing machines.

"We will ask the British and French finance ministers to go to the Commission shortly to propose to our European partners that all ecologically clean products should benefit from a reduced rate of VAT," French President Nicolas Sarkozy announced at a news conference last month after a meeting with British Prime Minister Gordon Brown

"It is time to give new incentives for people who want to buy environmentally friendly products. From fridges to insulation, all the major goods that may pollute but actually - by being produced in a way that is environmentally friendly - can benefit the environment," elaborated Brown.

However, as well intentioned the Anglo-French plans are, they are likely to be met with some hostility from affected industries and other EU governments, especially Sarkozy's idea to extend the scheme to cars.

Manufacturers of white goods are sceptical because less-energy efficient items attracting higher VAT would simply be sold at a higher discount, and they are also concerned that imports from outside the EU would not comply with new standards.

Moreover, any change to EU tax legislation requires the unanimous backing of all 27 member states, something that is unlikely to be forthcoming. Germany is known to be opposed to continued tinkering with VAT rules, Berlin arguing that the creation of new exemptions merely complicates the system.

While European Tax Commissioner Laszlo Kovacs has kept tight-lipped about the Anglo-French plan, he has said that fiscal policy "will have an important role to play" in energy policy at EU level, although the thrust of the European Commission's thinking on the issue is directed more towards carbon trading to achieve environmental objectives.

"Taxation should in the first place discourage what is undesirable, rewarding at the same time all sorts of positive behaviour, be it energy savings or environment-friendly activities," Kovacs said upon the release of the European Commission's Green Paper on the use of market-based instruments for environment and energy related policy purposes in March. "Tax revenues can then be used to favour economy-friendly activities, such as innovation or jobs."

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