Can the VAT rate on Electricity be Reduced?

Sinn Féin suggested recently that the VAT rate on electricity, currently at 13.5%, be temporarily removed to ease the burden on households over the winter. The government have claimed that they can't do that due to EU law. In this post, I will take a quick look at the VAT Directive and try to establish what is actually permitted. 

First of all, there is no doubt that the minimum vat rate allowed is 5%, so that rules out a complete removal of vat :

"The reduced rates shall be fixed as a percentage of the taxable amount, which may not be less than 5 %". 

Next, Article 118 states that certain services cannot go below 12% and this was referred to by the government as applicable to electricity. As electricity comes under Annex 1, it would seem that the government is correct (- -but wouldn't 12% be better than no reduction ? ) :

" Article 118

 Member States which, at 1 January 1991, were applying a reduced rate to the supply of goods or services other than those specified in Annex III may apply the reduced rate, or one of the two reduced rates, provided for in Article 98 to the supply of those goods or services, provided that the rate is not lower than 12 %". 

However, something that has been noticed before is that there is often a grey area with EU law. Article 102 deals specifically with the supply of energy, including electricity and allows for either of the two reduced rates to be applied. In the case of Ireland, the two reduced rates are 13.5% and 9% (for hotels) :

"Article 102

After consultation of the VAT Committee, each Member State may apply a reduced rate to the supply of natural gas, electricity or district heating"

It is remarkable that no reference is made here to the minimum rate of 12%, but as article 102 precedes 118, perhaps it is inferred that 102 can be relied upon alone in relation to electricity. In that case, surely, a reference to the exception under 102 should have been made in 118. 

I am no legal expert and perhaps someone can comment below on what they think. 

We can test the legal recipes in the EU VAT directive by the results. And here, it would seem to be the case that when we look at other European countries, the vat on electricity can be reduced to a minimum of 5%.

- - Portugal reduced the vat on electricity to 6% for low usage households in 2019. Initial figures show that the reduced rate applies to about 42% of customers with the rest paying vat at the higher rate of 23%.

- - Spain have introduced a temporary reduction to 10% for low usage customers until December 2021. After that, the vat will revert to the normal 21% rate. It is estimated that the vast majority of households and businesses will qualify for the reduced 10 % rate. 

- - Italy have a fixed vat rate of 10% on electricity. This proves that the minimum rate of 12% does not apply to electricity as per article 102 . Applying the Italian model to Ireland would mean we could reduce our vat rate to 9% on electricity. 

- - Greece have a super reduced vat rate of 6% on electricity since 2019. This also applies to medicine and vaccines as well as children's books. Their normal reduced rate is 13 % which applies to hotels. It is interesting to see that in Ireland we seem to have our priorities completely wrong with hotels regarded as more essential than electricity. 

- - The UK had along with Malta the lowest vat rate on electricity in the EU with a rate of 5%. One of the reasons for brexit is that they were not able to reduce it to zero. 

- - Luxembourg have a vat rate of 8% on electricity. 

It seems clear that the vat rate on electricity can be lowered to at least 9%. But the government have chosen the spending option as usual which means additional handouts to struggling families. Which in turn will lead to a cycle of inflation as bills rise even more. 

ECB Policy Keeps Afloat Economically Unviable Companies and Creates Market Bubbles - German Court Rules

The Supreme Court in Germany this week ruled that the European Central Bank's monetary policy, called the PSPP (Public Sector Asset Purchase Program) led to "the keeping afloat of economically unviable companies" due to the effect it had on maintaining low interest rates. 

As the PSPP lowers general interest rates, it allows economically unviable companies to stay on the market since they gain access to cheap credit.

Since 2015, the ECB have been buying up large quantities of government bonds, including high risk ones, distorting the EU market and propping up unsustainable debt and spending in the process. Contrary to what you may have read on some media outlets, this ruling has nothing to do with the emergency stimulus program initiated in response to the coronavirus crisis which I would argue was justified.  The PSPP program has been going on for five years. 

This blog was the first to reveal the shaky financial situation of many wind farms in Ireland. The ECB bond buying program we now learn was required to keep companies like these, aswell as banks, afloat. 

ECB bond buying is the sticky plaster of the EU. And it promotes unsustainable economic practices in direct contradiction with the EU's pledges to sustainability. 

The German court said this about the effects of the ECB program on banks :

Moreover, the effects of the PSPP on the banking sector must be taken into account. The programme affects balance sheets in the commercial banking sector by transferring large quantities of government bonds, including high-risk ones, to the balance sheets of the Eurosystem, which significantly improves the economic situation of the relevant banks and increases their credit rating. At the same time, it creates an incentive for banks to increase lending despite the low level of interest rates

The German Court also warned about the effects of the program on real estate and stock market bubbles :

Relevant economic policy effects of the PSPP furthermore include the risk of creating real estate and stock market bubbles as well as the economic and social impact on virtually all citizens, who are at least indirectly affected inter alia as shareholders, tenants, real estate owners, savers or insurance policy holders. For instance, there is a considerable risk of losses for private savings. This has direct consequences for (private) pension schemes and the returns they generate [...]. Both factors lead to, in part excessive, portfolio shifts [...], while risk premiums are in decline.

Artificial low interest rates was one of the main factors that led to the catastrophic building boom in Ireland. The EU and the European central banks clearly have not learned from these mistakes as history is repeating itself once again :

Real estate prices are on the rise with trends of sometimes particularly sharp increases – especially regarding residential property in major cities – [...], which possibly already come close to creating a “market bubble”, as the oral hearing confirmed. It is not for the Federal Constitutional Court to decide in the current proceedings how such concerns are to be weighed exactly in the context of a monetary policy decision; rather, the point is that such effects, which are created or at least amplified by the PSPP, must not be completely ignored. 

It then warns about the risky juggling act that the ECB is trying to keep up :

In addition, the longer the programme continues and the more its total volume increases, the greater the risk that the ESCB becomes dependent on Member State politics as it can no longer simply terminate and undo the programme without jeopardising the stability of the monetary union. 

The legal conclusions from all this are set out below, namely that the ECB never considered any negative effects from their policy and therefore acted disproportionately and ultra vires :

(2) In view of the considerable economic policy effects resulting from the PSPP – not all of which are discussed here –, it would have been incumbent upon the ECB to weigh these effects and balance them, based on proportionality considerations, against the expected positive contributions to achieving the monetary policy objective the ECB itself has set. It is not ascertainable that any such balancing was conducted, neither when the programme was first launched nor at a any point during its implementation; it is therefore not possible to review whether it was still proportionate to tolerate the economic and social policy effects of the PSPP, problematic as they may be in respect of the order of competences, or, possibly, at what point they have become disproportionate.

Neither the ECB’s press releases nor other public statements by ECB officials hint at any such balancing having taken place. For this lack of balancing and lack of stating the reasons informing such balancing, the ECB decisions at issue violate Art. 5(1) second sentence and Art. 5(4) TEU and, in consequence, exceed the monetary policy mandate of the ECB deriving from Art. 127(1) first sentence TFEU. cc)

The violation of the principle of proportionality is structurally significant. In this regard, the considerations set out above in relation to the Judgment of the CJEU in Weiss apply accordingly (cf. para. 124 et seq.). Therefore, the ECB’s actions amount to an ultra vires act.

How the EU repeatedly bypassed its Legal Framework and the Rights of its Citizens to implement its Renewable Programme

by Pat Swords

The EU makes repeated claims about the importance of the rule of law, but in reality, it fails to comply with its own legal framework and the rights of its citizens are not considered relevant, when it comes to implementing the New Green Deal. The ideological driven planned economies behind the Iron Curtain, with little regard for either environmental impacts or citizen’s rights, left behind a bitter legacy. In response emerged the United Nations Economic Convention for Europe’s (UNECE) Aarhus Convention on “Access to Information, Public Participation in Decision-Making and Access to Justice in Environmental Matters”, which has been part of EU legal framework since 2005. As the EU Commission has clarified:

“Such agreements take precedence over legal acts adopted under the EC Treaty (secondary Community law). So if there was a conflict between a Directive and a Convention, such as the Aarhus Convention, all Community or Member State administrative or judicial bodies would have to apply the provision of the Convention and derogate from the secondary law provision.”

As part of this Convention on environmental democracy, obligation placed on contracting parties include "fully integrating environmental considerations in governmental decision making and the consequent need for public authorities to be in possession of accurate, comprehensive and up to date environmental information".  That there should, in a transparent and fair framework, be a weighing up of environmental considerations is  no different than a key element of EU jurisprudence, the principle of proportionality, which requires that :

“Measures adopted by EU institutions do not exceed the limits of what is appropriate and necessary in order to attain the objectives legitimately pursued by the legislation in question; when there is a choice between several appropriate measures, recourse must be had to the least onerous, and the disadvantages caused must not be disproportionate to the aims pursued”.

As Recital 15 of Directive 2009/28/EC demonstrates, the EU’s 20% by 2020 renewable target was shared out among the Member States based on the existing percentage of renewables and a ‘fudge factor’ based on GDP. No environmental information existed on what was to be built, where it was to be built, what were the impacts and mitigation measures, etc. Having zero information to quantify the negative impact of carbon emissions, the alleged benefit of the 20% renewable target was related to the expected future price of carbon on the EU emissions trading scheme. A price, which is driven by political decisions related to allocations of carbon credits, with zero relationship to environmental impacts. Hence, what resulted was a circular logic of political target setting in the absence of reasoned decision making, with a complete absence of environmental information to justify the enormous impacts on the European environment and energy markets. 

This glaring democratic deficit was compounded by the supranational dynamics of the EU, where Directives before adoption should first be scrutinised by public participation at the Member State level, such as in Ireland by detailed Regulatory Impact Analysis with public engagement. However, in practice this was by-passed.

After adoption of Directive 2009/28/EC there was only a year for Member States to prepare National Renewable Energy Action Plans (NREAPs) to implement these renewable targets. The Member States essentially left the section on the environmental impacts of these NREAPs blank, as it was an optional requirement in the EU template. Such plans are also subject before adoption to the detailed requirements of the EU’s Directive on Strategic Environmental Assessment (2001/42/EC), in order to establish the justification, alternatives, impacts, mitigation measures and monitoring for unforeseen adverse impacts. This was also bypassed. 

Such legal failures led to a compliance case against the EU at the UNECE (ACCC/C/2010/54) and in 2014 a subsequent declaration of legal non-compliance in International law: Decision V/9g of the Meeting of the Parties on compliance by the European Union with its obligations under the Aarhus Convention. The UNECE recommendations require the EU to:

“…. adopt a proper regulatory framework and/or clear instructions for implementing article 7 of the Convention with respect to the adoption of NREAPs. This would entail that the Party concerned ensure that the arrangements for public participation in its member States are transparent and fair and that within those arrangements the necessary information is provided to the public. In addition, such a regulatory framework and/or clear instructions must ensure that the requirements of article 6, paragraphs 3, 4 and 8, of the Convention are met, including reasonable time frames, allowing sufficient time for informing the public and for the public to prepare and participate effectively, allowing for early public participation when all options are open, and ensuring that due account is taken of the outcome of the public participation. Moreover, the Party concerned must adapt the manner in which it evaluates NREAPs accordingly”. 

As the UNECE documentation records, the EU has since 2014 failed to make any progress to comply with the recommendations above, repeatedly failing to reply to specific questions and advice. Furthermore, at the subsequent 2017 UNECE Meeting of the Parties, it blocked with its 28 votes, a further decision of non-compliance against it. Namely its refusal to provide its citizens with effective access to justice, in order to bring such challenges of non-compliance of EU environmental law directly into the Court of Justice of the European Union. Ongoing UNECE compliance proceedings have further expanded to include Regulation 2018/1999 on the Energy Union and Climate Action and the manner in which the National Energy and Climate Plans (NECPs) were adopted. Yet again, the legal requirements of Strategic Environmental Assessment were bypassed and the public had no opportunity to participate in the decision-making, when all options were open and effective public participation could take place. 

If we consider the 2018 World Health Organisation’s Environmental Noise Guidelines for the European Region, while these adopted conditional recommendations for wind turbine noise, they make it very clear: “There are serious issues with noise exposure assessment related to wind turbines”.

“Balance of benefits versus harms and burdens: Further work is required to assess fully the benefits and harms of exposure to environmental noise from wind turbines and to clarify whether the potential benefits associated with reducing exposure to environmental noise for individuals living in the vicinity of wind turbines outweigh the impact on the development of renewable energy policies in the WHO European Region”.

Significant negative impacts are occurring on rural populations from the impacts of high-energy sources of low frequency sound (infrasound). There are legal liabilities, as the required Strategic Environmental Assessments and associated monitoring for unforeseen adverse environmental effects never occurred. 

Wind Farm that caused huge landslide makes losses for ESB

Photo : Irish Examiner

The Commission claims also that the construction of the wind farm required the destruction of large areas of coniferous forest amounting to 263 hectares.

 The Commission adds that, after the landslide which occurred on 16 October 2003 and the consequent ecological disaster, when the mass of peat which was dislodged from an area under development for the wind farm polluted the Owendalulleegh river, causing the death of about 50 000 fish and lasting damage to the fish spawning beds, Ireland carried out no fresh environmental impact assessment of this construction before the resumption of work on the site by the developer in 2004 [European Court Ruling 2008].

The construction of Derrybrien wind farm in 2003 caused a huge landslide resulting in the ecological disaster described above by the European Courts of Justice. Ten years later, Ireland still has not complied with their ruling and the EU are now seeking to impose fines on Ireland of €2 million.  

The wind farm was the largest in Europe at the time with 70 vestas turbines (of 0.85MW each) giving a total output of 59.5MW. It began operation in 2006. Ten years later in 2016, the accounts show that the wind farm was making a loss of €2.3 million. Turnover dropped by 25% to €5m and operating costs increased by 17% to €6.3m from 2015.  The company is owned by ESB and €20m in loans are still outstanding to them. It cost €64m to build. 

The above graph compares the load factor (actual output / maximum output) for Derrybrien and the national average as published by Eirgrid since 2010. The load factor has dropped significantly in the past two years to 23% in 2016, which was less than the national average of 28%. Not great for a wind farm located in the windy west of Ireland.  It could be that these particular wind turbines lose capacity over time. The first indication of a loss in capacity occurred in 2015 after eight years of operation. The national average was high at 33% whilst Derrybrien had a load factor 20% less at 26%. 

A loss of wind turbine capacity means higher maintenance costs and this is reflected in the accounts where operating costs have increased to €6.3m from €5.4m in 2016.   

The obvious question that needs to be asked about all this is are the massive environmental impact of wind farms built in such delicate areas worth it ? Whilst ESB will probably absorb  these losses who finally pays ? ESB is 95% owned by the Government. 

National Load Factors - Page 24 here.

Load factors for Derrybrien wind farm for 2015 and 2016 as per published accounts, other years were estimated based on annual turnovers.

France ignores European Court of Justice ruling

Ireland is likely to miss its renewable energy targets for 2020, resulting in hefty fines - Irish Times, 2015.

I came across this article today and it struck me as another good example of how judgements made by the European Court of Justice are simply ignored by Member States - in this case, France. Too often we peasants are threatened by our political class with fines from our European masters. But if France don't bother complying with ECJ rulings, then why should Ireland, or anyone else for that matter ? 

There are good reasons to believe that France, Germany, Greece, Poland, Spain and the UK will miss their 2020 targets. The bogeyman of EU fines should not be used to force the people of Ireland to accept short term, hasty and poorly thought out decisions on energy.

References

Likelihood of Member States meeting their 2020 targets :

See pages 78-79 of EPAW submission - http://westcorkwind.com/images/Adobe/EPAW_N-S.pdf

I'm French, but I've lost my patience with the EU. I'll be voting Leave - Article published by Telegraph, Feb 2015