Postpischil, R. et al.Ecological financial reform: product-related incentives as drivers of environmentally friendly patterns of production and consumption

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Rafael Postpischil, Klaus Jacob, Holger Bär, Ann-Cathrin Beermann, Anne Siemons, Katja Schumacher & Friedhelm Keimeyer

Release date:
June 2022

Federal Environmental Agency (UBA), texts | 38/2022

Within the framework of the research project on which this report is based, options for an ecological financial reform were elaborated that would start with final consumption. The work focuses on

1) an environmentally oriented value-added tax, and
2) taxes on consumption (or 'excise duties') and other product-related economic instruments.

This report focuses on the options for an environmentally oriented VAT reform identified in the project, both within the current European legal framework and considerations for reforms after the revision of the EU VAT Directive. The options for taxes on consumption are published in a separate report. The current VAT framework offers a number of feasible starting points to take ecological aspects into account. The greatest environmental and also health impact could be achieved by raising VAT on meat and other food of animal origin to the standard rate of 19 percent. In addition, considerable CO2 savings could be achieved if the reduced rate of 7 percent was granted for energy-efficient renovations in order to push climate protection in the building sector. Other ecologically sensible approaches would be a reduced rate on minor repairing and a change in the VAT assessment basis for donations in kind. By lowering the reduced VAT rate to 5 percent, negative social effects could be mitigated. Other options for VAT reform were also considered, but not analysed in depth (such as the VAT treatment of company cars or air transport). The ongoing reform process of the EU VAT Directive, which provides the framework for the admissibility of reduced rates, should be used to create further scope for greening VAT. It would be conceivable to temporarily promote the most environmentally friendly products and services in various market segments with a reduced rate. To this end, an opening clause for European eco-labels should be aimed at in the EU VAT Directive. In addition, ecologically significantly more advantageous goods and services could be promoted through reduced rates. Furthermore, the reduced rate for repair should be conceptualized in a broader sense. This would be particularly useful for energy-related products such as electrical and electronic equipment as well as furniture (and related textiles) from an ecological point of view.

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