The Tax Schemes Supporting the Sustainable Fashion Agenda in Europe
Author: David Leys
Publication date: 10 January 2022
Some European countries[1] adopted or are considering adopting tax incentives such as low value added tax (VAT) and tax shifts to favor corporate sustainability in the textile industry.[2] Using a carrot and stick approach, they reward fashion companies that produce garments with green impact, namely circular products, and penalize fashion companies that produce linear products with a negative impact to the environment. The linear products are not repaired, reused or recycled. Their ecological footprint generates waste of Earth's resources.
VAT differentiation is the first example of a tax incentive. For instance, Sweden adopted a law that reduces VAT rate from 25% to 12%[3] for recycled and repaired goods. In the UK, Members of the Parliament pushed for the adoption of similar VAT differentiation.[4] It could raise up to GBP 35 million to improve the UK’s textile recycling facilities.[5] However, the British government postponed this initiative to 2025.[6] Since the circular tax system based on resources and energy use has not yet existed, low VAT offers financial advantages both for the fashion company and the consumers.
Tax shift is the second example of a tax incentive. For instance, the Netherlands,[7] Sweden,[8] Germany[9] and Austria[10] introduced a tax increase on carbon emissions and a tax reduction on employer’s costs for companies that are producing circular products. The tax shift may solve the lack of demand from consumers to buy circular products, when fast fashion products become more expensive or comparable in costs to circular products.
These two public tax incentives may be accompanied by a private scheme called the Extended Producer Responsibility (EPR).[11] For instance, France has used an EPR scheme for end-of-use clothing, linen and shoes for nearly two decades.[12] The EPR is an eco-modulation of fees that incorporates all associated environmental costs in the product price. These costs can be calculated through the use of the Higg Index[13] for example. Higg Index, developed by the Sustainable Apparel Coalition, enables fashion companies of all sizes to accurately measure and score their product’s sustainability performance. Environmental costs are then added to the price of the end product of the fashion company. This incentivizes the producers to design recycled products and minimize waste.
[1] For instance, Sweden, Germany, the Netherlands, Austria and the UK to name but a few.
[2] Elke Asen, Carbon Taxes in Europe, TAX FOUNDATION (Oct. 8, 2020), available at https://taxfoundation.org/carbon-taxes-in-europe-2020/.
[3] World Economic Forum, Sweden is paying people to fix their belongings instead of throwing them away, available at https://www.weforum.org/agenda/2016/10/sweden-is-tackling-its-throwaway-culture-with-tax-breaks-on-repairs-will-it-work/.
[4] UK Parliament, Fixing fashion: clothing consumption and sustainability, Chapter 5, New economic models for the fashion industry at 145, ENVIRONMENTAL AUDIT COMMITTEE (Feb. 19, 2019), available at https://publications.parliament.uk/pa/cm201719/cmselect/cmenvaud/1952/full-report.html#heading-9.
[5] See UK Parliament, Fixing fashion: clothing consumption and sustainability, Point 4. Textile Waste and Collection, available at https://publications.parliament.uk/pa/cm201719/cmselect/cmenvaud/1952/report-files/195207.htm.
[6] Moya Crockett, Ministers just rejected a 1p tax that would tackle the UK’s fast fashion problem, STYLIST, available at https://www.stylist.co.uk/fashion/tax-new-clothes-report-environmental-audit-committee-sustainable-fashion/252201; Could This Fast Fashion Tax Save The World?, GRAZIA, available at https://graziadaily.co.uk/fashion/news/fast-fashion-sustainability-environmental-impact-2/.
[7] A price of EUR 30 per ton of CO₂ is being proposed for 2021, increasing to EUR 125 per ton of CO₂ in 2030. See OECD, Environmentally related taxes on energy use, available at https://www.oecd.org/tax/tax-policy/environmental-tax-profile-netherlands.pdf; PwC, The Dutch CO₂ levy is to be introduced via the EU-ETS system alongside the European system for pricing CO₂, available at https://www.pwc.nl/en/insights-and-publications/tax-news/pwc-special-budget-day/taxplan-2021-co-2-levy.html#:~:text=The%20levy%20is%20subject%20to,emissions%20are%20to%20be%20taxed; Dentons, The Dutch carbon dioxide emission tax, 2020, available at https://www.dentons.com/en/insights/alerts/2020/november/26/the-dutch-carbon-emission-tax; Loyens & Loeff, The Carbon tax is coming (after all), Apr. 20, 2020, available at https://www.loyensloeff.com/en/en/news/news-articles/the-carbon-tax-is-coming-after-all-n19198/.
[8] The Swedish carbon tax is today by far the highest in the world, with a price of SEK 1180 (€110/US$123) per ton fossil CO2 emitted. Looking Back on 30 Years of Carbon Taxes in Sweden, TAX FOUNDATION (Sep. 23, 2020), available at https://taxfoundation.org/sweden-carbon-tax-revenue-greenhouse-gas-emissions/.
[9] The German government has announced a new carbon tax. The Federal Government and the federal states agreed on higher rates and their increases for the coming years. From January 1, 2021, the rate will be EUR 25 per ton of CO2 emissions. This amount will rise to EUR 55 in 2025 and EUR 65 in 2026.
[10] OECD, Environmentally related taxes, Taxes on energy use, available at https://www.oecd.org/tax/tax-policy/environmental-tax-profile-austria.pdf.
[11] OECD, Extended Producer responsibility, available at https://www.oecd.org/env/tools-evaluation/extendedproducerresponsibility.htm.
[12] Extended Producer Responsibility (EPR) The French experience, available at https://ec.europa.eu/environment/waste/framework/pdf/seminar_03_2013/5.%20EPR%20schemes%20FR%20experience%20Baptiste%20Legay.pdf; French Ministry of Environment, 20 years of EPR in France: achievements, lessons learned and challenges ahead (June 2014), available at https://www.oecd.org/environment/waste/France%20(final).pdf.
[13] Website of the Apparel Coalition, available at https://apparelcoalition.org/the-higg-index/.
David Leys, Winter Policy Analyst
David is a qualified lawyer of the Brussels Bar and an applicant for California as well as New York Bars. With experience at Sidley Austin LLP, the European Commission, and the Embassy of Belgium in Tokyo, he brings an international perspective towards trade, competition and intellectual property.
Having twice attended the Marché du Film at the Festival of Cannes, David has considerable experience in licensing, partnerships and NDAs for SMEs in the cultural and creative sectors. He has recovered up to 200,000 USD for SMEs by pleading before trial and appeal courts in commercial and IP laws.
David’s other notable projects, which include dealing with an EU merger for Fortune 500 company and conducting due diligence for an IPO reflect his interest in new technologies, energy, and the Arts. He has advised and represented governments, Fortune Global 500 companies, and associations on international trade and agro-food matters.
He is extending his previous experience in trade law in the solar panel, clothing, and food industries at Unbuilt Labs, where he will be conducting legal and policy research on sustainable fashion.
His articles on diplomatic protection, trade and customs law consequences of Brexit, and trademark royalties in customs, were published in the Harvard International Law Journal Online and the Global Trade and Customs Journal.
Columbia Law School, New York City, Master in Laws (LL.M.) ‘20
College of Europe, Bruges, Master in European Law (LL.M.) ‘12
Université Catholique de Louvain, Master in Law (J.D. equivalent) ‘11
Université Saint-Louis, Brussels, Bachelor in Law ‘09