Margaret Beckett says a central policy of Britain’s European Union presidency is to cut carbon dioxide emissions. So why is a directive that would actually do that being scrapped?

At a recent dinner I attended, I heard Margaret Beckett, the secretary of state for the environment, stressing that the UK government’s agenda, at home and for its presidency of the European Union, was based around ensuring better regulation and tackling climate change. I would not have been surprised if she had added job creation and competitiveness in the global market. And for the construction sector, all of these issues are linked.

One of the easiest and cheapest ways for governments to deal with climate change is to tackle the buildings sector, which is usually thought to be responsible for 40% of all carbon dioxide emissions. This is one of the areas covered by the European commission’s green paper on energy efficiency. It looks at options for delivering efficient energy use, such as extending the existing energy performance directive to include smaller buildings. It also looks at incentives for making energy efficiency improvements in buildings. Fiscal incentives such as reduced VAT rates for refurbishment would be one such option.

The irony is that this possibility already exists, but is about to be scrapped. Since 1999, countries have been allowed to apply reduced VAT rates on the renovation and repair of homes. Existing buildings are the main source of CO2 emissions and such an incentive has encouraged homeowners to invest in energy saving technology. Belgium, Spain, France, Italy, the Netherlands and Portugal all signed up; the UK decided to apply the directive only on the Isle of Man. So why, just when we need it to deliver priority climate change policy objectives, will the scheme be coming to an end on 31 December this year?

The reduced rate scheme found itself included in a general review of VAT rates carried out in 2003 by the European commission, the aim being to simplify and rationalise rates in line with the internal market. The EU governments have failed to agree on the content of any change ever since and there is no sign of the unanimity that is needed on all EU tax decisions.

Since 1999, EU countries have been allowed to apply reduced rates on the renovation of homes; the UK decided to apply the directive only on the Isle of Man. So why, when we need it most, is the scheme ending?

The case for keeping reduced rates is a strong one. The 1999 scheme was introduced in the first place to deliver two much needed elements to the construction sector – a reduction in the levels of undeclared work, and job creation. The European Construction Industry Federation estimates that it has done both, and that a return to the old VAT rates would threaten up to 250,000 jobs from the start of 2006.

The argument is much the same in the UK. Cutting the VAT rate on renovation and maintenance to 5% could sort out the uneven playing field between bona fide traders and cowboy builders. It would also reduce the unjustifiable gap with new build, which is zero-rated.

I asked Mrs Beckett whether she agreed that we needed not just better regulation but more joined-up regulation, particularly to tackle climate change. She said she took my point.