FIRST REPORT
PRE-BUDGET REPORT
Summary of conclusions and recommendations
1. The Committee's conclusions and recommendations
are listed below:
The Government's statements
(a) We wholeheartedly welcome the Government's
statements committing it to the pursuit of environmental sustainability
and the use of environmental taxation.
Consultation
(b) We regard consultation in advance of
each Budget as an essential process and we recommend that this
consultation always address sustainable development objectives.
We would expect to contribute to such consultation on a regular
basis.
Code for Fiscal Stability
(c) We conclude that the principle of fairness
in the proposed Code for Fiscal Stability does not adequately
reflect the Government's commitment to sustainable development.
We recommend that any code for fiscal management includes a clear
expression of the Government's commitments to integrate environmental,
social and economic considerations and to reform the tax system
to provide disincentives to causing environmental damage and incentives
to following good environmental practice.
Environmental accounting and information
(d) We agree with witnesses' concern that
the rhetoric on the integration of economic and environmental
considerations in the Pre-Budget Report was not supported by the
provision of any information on the impact of economic activity
on the environment.
(e) Taking the Pre-Budget Report as an example,
it is difficult to reconcile the status of environmentally sustainable
growth as a 'core feature' of the Government's economic policy
with the absence of any illustration of environmental trends that
have a clear link with economic activity.
(f) We recommend that, as a minimum, the
core set of sustainable development indicators, being examined
by the Government, be included in key economic documents such
as the Pre-Budget Report and the Financial Statement and Budget
Report in future.
Strategy
(g) We were concerned that the Pre-Budget
Report did not contain any evidence of a strategic approach in
line with the Statement of Intent on Environmental Taxation.
(h) Given the scale of the implications for
the tax system of the Government's commitment to environmental
protection and sustainable development we believe that the need
for work on a long term strategic approach is both vital and urgent.
(i) We recommend that the Government should
establish an advisory body on environmental taxation. Such a
body could take the form of a standing green tax commission as
recommended in our evidence and this would be our preference.
An indicator
(j) We recommend that the Government identify
its list of environmental taxes and the proportion of total tax
revenue contributed by these taxes and publish this figure as
an indicator of taxation on environmental 'bads'.
A target
(k) We recommend that consideration be given
to the setting of a target for a progressive increase in the proportion
of revenue yield from environmental taxes thereby creating the
potential for reductions in the taxation of 'goods'. Progress
on this target should be reported in each Budget assessment.
Assessment of the Budget
(l) In our view it is essential for the Government
to publish an assessment of the environmental impact of the Budget
and we regard the key features of such an assessment to be:
- the identification of both positive and negative
impacts;
- the quantification of impacts; and
- the provision of a clear statement regarding
when and how actual impacts will be assessed.
We regard Treasury's current intentions as falling
short of the original proposals.
(m) The fruits of the scrutiny of the tax
system as a whole, where relevant to environmental objectives,
should be fed in to the annual Budget assessments over time so
as to build up a more comprehensive picture of the signals being
given out by the tax system with regard to environmental protection
and sustainable development.
Specific measures
(n) We recommend that the Government pursue
its negotiations within the European Union as a matter of urgency
to widen the scope of the reduction of VAT on energy saving measures.
Over the longer term we recommend that the level of VAT on domestic
fuel and power be fully appraised as part of the response to the
UK's obligations under the Kyoto Protocol and that this appraisal
include examination of the feasibility of using a tax-free allowance
for domestic fuel and other measures to address issues of distributional
impact.
(o) Further candidates for action should
include the harmonisation of the rate of VAT levied on renovation
and new build.
(p) We recommend that the Government consider
levying a tax on water pollution from point sources to provide
a continuing incentive for abatement.
(q) We recommend that the Government consider
a package of measures to reduce pollution of water supplies arising
from pesticides.
(r) We recommend that there should continue
to be close monitoring of the impacts and effectiveness of the
landfill tax. This would allow any fine-tuning needed to deal
with incipient problems, or consideration of an increase in the
rates, to be promptly addressed, thereby enabling progress towards
the objectives of improving waste management practices to be optimised.
(s) As regards an aggregates tax, we recommend
that the research commissioned by the Government be published
and there should be full consultation undertaken to determine
to what extent a tax might be able to capture any externalities
identified therein. Consultation should also explicitly include
the question of in what ways, and to what extent, the incentive
effects of a tax might alter the practice of the aggregates and
construction industry.
(t) As regards taxes on vehicles and vehicles
use, we recommend that:
- the Government should fully appraise the environmental
effects of introducing differentials to the rate of vehicle excise
duty based around emission standards for regulated pollutants
and for CO2 as well as engine size and efficiency;
- the Government should appraise the incentive
effects of higher rates of escalation on road fuel duty and take
account of the most up to date scientific evidence in setting
the differentials; and
- in the light of the growing consensus we have
identified the Government should address the perverse incentives
in the taxation of company cars as part of its integrated transport
policy if not sooner.
To realise fully the benefits of these measures the
integrated transport strategy must match steady increases in the
overall cost of motoring with steady improvements in the availability
of real alternatives in the form of better public transport, more
energy efficient vehicles and alternative fuels.
Introduction
2. The Committee was established on 10 November
1997 to consider to what extent the policies and programmes of
government departments and non-departmental public bodies contribute
to environmental protection and sustainable development; to audit
their performance against such targets as may be set for them
by Her Majesty's Ministers; and to report thereon to the House.
3. The Committee intends to monitor and review regularly
the environmental performance of Government departments and non-departmental
public bodies against those organisations' own declared objectives
and targets as well as objective external criteria. Where no
such indicators or targets exist at present, the Committee will
wish to examine how they might be established. It will also wish
to review the effectiveness and efficiency of the measures selected
to achieve declared targets on a regular basis.
4. At its first meeting the Committee agreed to examine
the implications for environmental protection and sustainable
development of the Pre-Budget Report by the Chancellor (25 November
1997) against the background of the Statement of Intent on Environmental
Taxation issued by the Financial Secretary (2 July 1997). The
Committee identified in particular:
- shifting the burden of taxation from 'goods'
to 'bads'[1];
- the principle of 'fairness' in the proposed
Code for Fiscal Stability;
- assessment of the environmental impact of the
Budget;
- environmental accounting; and
- water pollution, aggregates extraction, energy
efficiency, landfill and vehicle use (specific measures were discussed
in these areas in the Pre-Budget Report under the heading "Fairness
to future generations and the world in which we live".)
5. The Committee also agreed to consider the Government's
arrangements for integrating considerations of environmental protection
and sustainable development into its decision-making processes.
This inquiry will conclude later in the year.
6. We were grateful for memoranda from the Treasury
which expanded upon some of these matters and for the opportunity
to discuss them with the Financial Secretary in public session.
The Committee also took oral evidence from Mr Gerald Holtham
and Mr Chris Hewett, from the Institute for Public Policy Research
and Dr Paul Ekins, Keele University and Forum for the Future.
It also examined Professor Peter Davies (Chief Economist, British
Petroleum), Dr David Humphries (Head of Economics, Rio Tinto)
and Mr Michael Roberts (Head, CBI Industrial Policy Group), in
their capacity as Chairman and members of the CBI's Green Taxes
Working Group. We received written evidence from a number of
organisations which are listed at the back of the Report.
7. In addition to their oral evidence we were grateful
for the specialist advice offered by Dr Ekins and Mr Hewett.
Mr Derek Osborn, CB, Chairman of the European Environment Agency,
also assisted the Committee in this regard.
This Report
8. The Pre-Budget Report deals with a range of economic
issues, the public sector balance sheet and revenue and expenditure.
The principal focus of this inquiry was on the potential of
the tax system to deliver environmental objectives and make economic
development more sustainable, as recognised in the July Statement
of Intent on Environmental Taxation. We note the Government's
expectations that its Comprehensive Spending Review will be concluded
in the Summer. We will examine the account taken of the environment
in this review and the contributions of Green Ministers to this
process in the Report of our further inquiry.
Environmental taxation
9. There is no universally agreed definition of what
constitutes an environmental tax. We understand environmental,
or 'green', taxes to refer to those tax measures whose objectives
include the implementation of the polluter pays principle,
the internalisation of external environmental costs, or the encouragement
of more sustainable choices by producers and consumers. Tax measures
can accomplish this by altering price signals in the market to
include 'information' about the impact of production and consumption
upon the environment. Environmental taxes would include those
on the emissions of a particular pollutant, an environmentally
damaging activity, the depletion of a resource, or any consumption
of goods and services that imposes excessive[2]
environmental costs on society as a whole.
10. If costs to the environment are not reflected
in any way in the actual costs of production of a good or service,
nor therefore in the price, they cannot be fully taken into account
in the decisions people take over how they spend their money.
It would follow that these spending decisions themselves have
an effect on what choices are offered to people by producers in
future and a pattern of unsustainable economic development may
be established.
11. As well as affecting price signals environmental
taxes obviously raise revenue. Some will raise little revenue
and, where successful, work towards eliminating their own tax
base. Examples of these would be taxes on specific emissions
of pollutants where there is a significant potential for abatement.
Other taxes can raise significant amounts of revenue and examples
are road fuel duty, or hypothetically, an energy tax. The implications
of these revenues are the subject of some debate. We have identified
three issues:
- The implication of a shift in the tax burden
from 'goods' to 'bads' is that the revenue raised from taxing
'bads', such as environmental damage, will be off-set by a concomitant
reduction in taxes on 'goods', such as employment.
- Environmental taxes can also be accompanied with
complementary initiatives designed to promote achievement of the
policy objectives (either directly by increasing relevant price
elasticities, or indirectly by supporting associated projects).
- The introduction of environmental taxes should
be linked firmly with ameliorating measures, where appropriate,
to off-set the effects on those disproportionately affected.
This is most important in regard to effects on low income groups
and in particular areas. Account should also be taken of possible
effects on the competitiveness of particular industrial sectors.
The issue of hypothecation is controversial. We
recognise that direct linkage between a specific tax and a particular
spend may not meet the accepted principles of good public expenditure.
However, we believe that there may be cases where such linkage
is appropriate and that it should not be ruled out as a matter
of course.
12. These concerns and conclusions are shared by
a wide variety of international organisations including the United
Nations, the OECD and the European Union. In the UK the Royal
Commission on Environmental Pollution, the Government Panel, and
the Round Table, on Sustainable Development and the Advisory Committee
on Business and the Environment have pointed towards the use of
environmental taxes in a variety of cases. The majority of our
evidence, from industry and commerce as well as from non-departmental
public bodies and non-government organisations, approved in principle
of such measures.
13. We were grateful for evidence containing an analysis
of the issues involved in defining environmental taxes, amongst
other matters, from the Centre for Social and Economic Research
on the Global Environment.[3]
This sounded a note of caution in questioning the assumption
of environmental benefits from taxes which did not specifically
address precisely defined environmental pressures. The CBI Green
Taxes Working Group raised similar concerns.[4]
We note difficulties in assessing exact externalities of this
kind in the state of knowledge and with the analytical tools
currently existing. We believe that further work must be done
to define and quantify the environmental impacts of policies and
actions, and of existing or possible taxes, and to assign values
to these external costs and benefits where possible. But we believe
that the absence of full or fully accepted valuation of all externalities
should not preclude consideration of particular environmental
taxes which may sometimes be justified on the basis of broader
precautionary considerations, or in order to influence behaviour
in a more sustainable direction.
14. We believe that environmental taxes have an important
role to play but will not secure the protection of the environment
on their own and will not be appropriate in every case. It is
vital to provide an integrated response mindful of the three elements
of sustainable development: economy, environment and social equity.
In developing the right response, other policies, such as education,
voluntary action, regulation, land-use planning and other government
initiatives, will play a more or less important role depending
on the issue in question. Nevertheless, we agree with the concern
of the Local Government Association, echoed by many of our witnesses,
who argued that other initiatives to promote sustainable development
"fail or require disproportionate effort because they are
working against price signals".[5]
1
In this context 'goods' (such as employment) are contrasted with
'bads' (such as environmental damage). Back
2
Excessive in this context
refers to negative environmental effects imposed by private production
or consumption on society as a whole where the marginal social
cost is greater than the marginal private benefit. Back
3
Ev p97 Back
4
Q66 Back
5
Ev p47 and QQ44 & 48 Back
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