Could Green VAT Encourage Sustainable Consumption and Production?

ANALYSIS - Taxes and a new system of value added tax (VAT) could be used to stimulate sustainable agriculture, food production and consumption, writes Chris Harris.
calendar icon 18 November 2013
clock icon 5 minute read

The concept would see consumers directed towards more sustainable and environmentally friendly products through taxation.

To ensure that the environmental impact of products is reflected in their costs, a new study published by the European Commission puts forward recommendations for a system of green VAT based on life cycle assessment.

This new economic tool would encourage sustainable production and consumption the researchers claim.

The paper, Towards stronger measures for sustainable consumption and production policies: proposal of a new fiscal framework based on a life cycle approach, by C. De Camillis and M. Goralczyk and published in the International Journal of Life Cycle Assessment proposes a system whereby VAT, calculated based on the environmental impact of the whole life cycle of the product, is used to guide consumers towards more sustainable, environmentally-friendly products.

The importance of decoupling environmental degradation from economic growth is highlighted by the EU’s Roadmap to a Resource Efficient Europe and Sustainable Consumption and Production and Sustainable Industrial Policy Action Plan.

The roadmap outlines how Europe's economy can be transformed into a sustainable one by 2050.

It proposes ways to increase resource productivity and decouple economic growth from resource use and its environmental impact. It illustrates how policies interrelate and build on each other.

It focuses on areas where policy action can make a real difference such as inconsistencies in policy and market failures to ensure that policies are all going in the same direction.

It also addresses prices that do not reflect the real costs of resource use and the need for more long-term innovative thinking are also in the spotlight.

Key resources are analysed from a life-cycle and value-chain perspective.

The Resource Efficiency Roadmap provides a framework in which future actions can be designed and implemented coherently and it sets out a vision for the structural and technological change needed up to 2050, with milestones to be reached by 2020.

The Sustainable Consumption and Production and Sustainable Industrial Policy (SCP/SIP) Action Plan, produced in 2008, includes a series of proposals on sustainable consumption and production that will contribute to improving the environmental performance of products and increase the demand for more sustainable goods and production technologies.

The latest report for the European Commission in the International Journal of Life Cycle Assessment suggests that market-based instruments, such as subsidies or environmental taxes, could play a valuable part in achieving these objectives and are of particular interest as they are less expensive to implement than regulatory instruments, such as bans or quotas.

Using LCA, which the researchers say is a tried and tested methodology can provide accurate estimates of a product’s cumulative environmental impact over its life cycle.

The researchers say that the VAT rates should be calculated based on either a scoring system incorporating multiple environmental impacts, or the carbon footprint of the product.

They also look at a third method, which ensures that the state budget is not negatively affected by the use of incentives.

The environmental impact scoring system is a single score indicator based on information regarding a wide range of environmental impacts, such as global warming, human and environmental toxicity, natural resource depletion, ozone layer depletion and air pollution.

The researchers suggest that these impacts should be assigned a ‘weight’ to indicate their relative importance and while they admit that there is no objective basis for the weighting procedure, they say that a decision about the weights associated with each impact category could be based on the priorities set within the policy framework.

They add that a key advantage of this system is that the operational framework for VAT is already in place.

However, there are other components that would need to be developed for the system to work.

For example, producers would need to provide an environmental impact score for products based on data from the entire supply chain.

This would require large, freely available, reference datasets.

Leading on from this, a public body would also be required to implement the system and inspect environmental declarations.

The researchers emphasise that this system would need a full and thorough assessment before any attempt at its implementation. For example, issues regarding international trading agreements would need to be resolved and tools for running environmental assessments on products would need to be developed.

While on the one hand the research team appears to have laid out a structure for weighting environmental impacts, as has been seen in debates over the implementation of the Common Agricultural Policy in the EU and on a global scale the negotiations over sanitary and phytosanitary measures and subsidies in the Doha round of the World Trade Organisation negotiations, the discussions on weighting could become stuck in bureaucracy and political intransigence.

Overall, however, the researchers conclude that this combination of VAT and LCA has the potential to have a significant impact on the sustainability of consumption and production.

Environmentally-friendly products are often more expensive, where production is restricted to more costly sustainable processes. This system will ensure that such eco-friendly products will be able to better compete with others on the market.

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