I have been wondering why variable VAT rates aren’t applied to support buying less goods and buying more services?
In general for reducing climate impact we want people to buy less stuff (generally lots of carbon embedded) and more services (generally less carbon embedded).
There are exceptions like air travel (a service with a large climate impact), and some things that may have a larger impact, but we wouldn’t want to increase the price (like food). These could be dealt with as exceptions. But in general, to promote a lower carbon economy we want to promote renting things rather than owning them so we use them for longer and more efficiently. Also, repairing things that we do own (a service) is preferable to throwing it out and buying a new one (a good).
So why cant we make a high VAT rate on goods and a lower one on services?
Recently I have done alot of reading on the EU Digital Product Passport and the ecodesign directive, one of the goals of which are to help people make better, more ecological choices when purchasing goods. Once information about the footprint of the goods is known, a tax rate could be applied to the amount of CO2 embedded in the production and distribution of the product, as hinted by some EU Commission policy makers. This makes sense, and I think that it is a great goal to add impact information to products and my company, Entity Systems is trying to do just that. Another method of taxing carbon embedded on products has been proposed as a CAT (a Carbon Added Tax by this Dutch consultancy). But changing people’s buying behaviour by introducing more information to products and then on the basis of this information perhaps taxing them differently is a very long term goal, with a time horizon of decades before it is implemented fully.
In contrast, the climate crisis is a crisis. It must be addressed now. We don’t have 10 years to implement new policies and then another 10 years for them to have an affect on purchasing decisions, it must be done like now , this year. So if the goal is to reduce CO2 emissions to save humanity from the nasty effects of climate change we must have polices implemented this year that do this.
Why cant we just do a hard and fast policy now to cause a drastic shift to services, with the intention of implementing a more precise consumption tax over the long term?
And a question for economists in general why can’t the VAT rate be used as a tool for regulating consumption in general? Why do our economies only use the central bank interest rate as a policy tool for this and not the VAT rate? Other than the obvious political hurdles of course…
Policy wonks is this being discussed as an option for fighting the climate crisis?