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Final report on VAT reforms published by Rafael Postpischil, Dr. Klaus Jacob and colleagues on behalf of the Federal Environment Agency (UBA)

News from Jun 19, 2022

The current VAT framework sets a number of false ecological incentives. The Research Center for Sustainability (FFN), the Öko-Institut and the Forum for Ecological and Social Market Economy (FÖS) have elaborated options for an ecological financial reform that would target final consumption. This report focuses on the options for an environmentally oriented VAT reform identified in the project. The current amendment of the EU VAT Directive from April 2022 is not taken into account, as the study was completed beforehand.

The current VAT framework offers a number of feasible starting points to take ecological aspects into account. The greatest impact could be achieved by raising VAT on meat and other food of animal origin to the standard rate of 19 %, which would save up to six million tons of greenhouse gas emission every year. In addition to the abolition of this privilege, the VAT for plant-based foods could be reduced as a social compensation. Because of the recent rise in food prices, the UBA recommends a complete VAT exemption for plant-based staple foods, which has been possible since the EU VAT Directive was amended.

In addition, major CO2 savings of one million tons per year could be achieved if the reduced VAT rate of 7 % was granted for energy-efficient renovations to push climate mitigation in the building sector. Here again the amendment of the EU VAT Directive offers new possibilities. Therefore, the UBA recommends completely exempting the delivery and installation of solar systems from VAT and promoting the optimization of heating systems by charging only 7 %.

Furthermore, increased attention to repairs could be expected if repairs receive appreciation as a result of  VAT reduction. Besides that, it is recommended to change the VAT assessment basis for donations in kind to charitable organizations. This would help boosting the circular economy and compensating negative social effects. The report also examines other VAT approaches, for example in relation to company cars and air traffic, but these have not been detailed.

The analyses have shown that there are limits to the extent to which VAT can be designed to achieve a comprehensive greening of private consumption. Based on this, it was examined how the currently ongoing reform process of VAT at the European level can be used to expand the scope for action in environmentally policy. VAT could be designed as an ecological innovation instrument by granting reduced VAT rates for ecologically beneficial products and services. In addition, a reduced rate for the repair of everyday items such as electrical and electronic devices and furniture is recommended.

Read the full report here.

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