The use of differential VAT rates to promote changes in consumption and innovation

Abstract

6. Case study: Domestic energy 6.1 Introduction 6.2 Assessing the impact of VAT differentiation 6.3 Case for lowering VAT to reduced rate for renewable sourced electricity where it is taxed at standard rate 7. Case study: Meat and dairy products 7.1 Main factors determining the impact of VAT differentiation 7.2 Assessing the impact of VAT differentiation 7.3 Discussion and conclusions Annex 7.A: Price Elasticities of Demand Annex 7.B : Environmental Impact of Meat and Dairy Consumption 8. Conclusions 8.1 Producers and importers 8.2 Retailers and installers 8.3 Consumers 8.4 Environmental impact 8.5 Other considerations ReferencesThe use of differential VAT rates to promote changes in consumption and innovation 3 SummaryThis study deals with the likely impacts of differential VAT rates for specific products with recognised environmental benefits.Applying a reduced VAT rate to environmentally preferable products while taxing the less preferable ones at the standard rate could lead to a relative price reduction for the 'greener' product and thus stimulate the demand for this product.Likewise, increasing the VAT rate on environmentally harmful products that are currently taxed at a reduced rate might also steer demand and supply in a more sustainable direction.The main research question was how producers, retailers and consumers would change their behaviour in response to the introduction of reduced VAT rates for 'greener' products and to the increase of reduced rates on 'non-green' products to the standard rate.This question has been addressed in various ways: through a literature survey, by reviewing experiences with previous and existing (environmentally motivated) VAT reduction and other subsidy schemes, and by directly contacting stakeholders.Five case studies have been carried out as illustrations and in-depth explorations of the posssible impacts.Interim results of ongoing parallel studies on related subjects have been taken into account.A possible VAT differentiation will be just one among several measures of a sustainable production and consumption policy.Its effectiveness will therefore to a large extent be determined by the other elements of the package.These policies are only partially harmonised at EU level, and this is an additional reason why the impact of environmental VAT differentiation will differ between Member States.