Sunday, December 7, 2008

Europe Moves to Adopt Green Tax Cuts

Last week, in a dramatic about face and historic first, the European Commission, which drafts legislation for the EU, embraced green tax cuts as part of its European Economic Recovery Plan.
The heretofore non-existent policy had been proposed only in just the last year by prominent politicians from both the left and the right, notably British PM Gordon Brown and French President Nicolas Sarkozy.

The Commission proposes "reduced VAT rates for green products and services, aimed at improving in particular energy efficiency in buildings," and indicates it will "urgently draw up measures for other products which offer very high potential for energy savings such as televisions, domestic lighting, refrigerators and freezers, washing machines, boilers and air-conditioners." The plan also calls for "Member States to provide further incentives to consumers to stimulate demand for environmentally-friendly products." In particular, "Member States should [reduce] property tax for energy-performing buildings" and also reduce taxes for "lower emission cars."

This same green tax cut proposal was first put forward by center-left British Labour Prime Minister Gordon Brown just a little over a year ago, and quickly garnered the support of center-right French President Nicolas Sarkozy. Brown argued strongly that
"Lower taxes can make a big difference to whether people buy environmentally friendly goods." However, the European Commission quickly shot it down just last March. Since then, however, Sarkozy has become President of the European Union (with an ambitious green agenda) and the world economy has entered its worst crisis in decades. The EU is now willing to consider all means of economic stimulus at its disposal, and green tax cuts are now, for the first time ever, part of that mix.

The speed with which this proposal has gone from introduction to acceptance at the highest levels of the European government, in just about one year, is remarkable. While clearly the EC could be bolder and go even further with this concept, such as VAT (and other) tax reductions directly for ultra-high-mileage vehicles and green energy from renewable sources, it is likely that this is just the start, and there is more to come. That it has been championed by politicians from both the left and right is also noteworthy. Indeed it begs the question, if the European left and right can so quickly agree on the value of this policy, particularly as one of the few green policies that doubles as an aid to economic recovery, why isn't it even on the radar of their American counterparts?

If anyone has any ideas as to why, I'm all ears...


Anonymous said...

Great catch on a story the media seems to have missed! One possible reason for that omission may be that this aspect of the recovery plan was deliberately released without fanfare by the European Commission for political reasons, in order to downplay the role of Britain and France in proposing the policy. Possibly, the EC felt that other Member States would more willingly adopt the policy if it was not perceived as simply a British/French triumph.

Nick Jainschigg said...

Last night (December 7th) the BBC Newshour on radio had an extended report on the adoption of solar nergy in the former DDR (East Germany). Through a system of staged price supports and tax abatements, a large area of former industrial wasteland is now one of the heaviest users and manufacturers of solar power and panels. All in a country not known for its excessive sunniness.

I couldn't find a link to the radio report, but this somewhat older written report covers most of the bases.

Timothy Reed said...

What do you think of this? Chu mentions improving the tax environment for green energy without specifics, then goes right on to carbon caps and trading.


Timothy Reed said...

It's in the text. Here's the relevant quote although definitely read the entire Q&A:
Q. What is your vote for the best role of government in shaping long-term efforts? (Is FutureGen the right kind of model? If not, what is..? is N.I.H. a good model? Is the Energy Department the wrong venue?) A lot of economists say industry is just not able to focus that far forward in R and D. Do you agree?

A. We need to alter the playing field with tax and fiscal polices (such as a carbon cap and trade with a minimum trading value so that companies could plan for sensible, long-term investments). This has to be done in order to account for the so-called “externalities” - real costs that are not yet included in the price of various forms of energy. Developed countries have made this step with air and water pollution by enacting outright regulations and installing a cap and trade system.

Once industry is assured that the bottom will not fall out (such as price of oil, gas, or the trading value of avoided carbon, etc., suddenly plummeting) long-term investments will be made. The wind industry in Denmark and Germany proceeded in this way. Off the top of my head, $70/avoided ton would work wonders in spurring long-term investments and innovation.

Rod Randolph Richardson said...

Good question, Tim. I'll answer it as part of my next post.