Select Committee on Environmental Audit Eighth Report


Appraisal of tax measures

35. The need for overall consideration of the impact of economic policy on the environment leads us on to the question of how the Government should appraise individual budget measures to ensure that they contribute to the pursuit of environmentally sustainable growth.

36. In our report on the Pre-Budget Report 1998 we described the Government's approach to appraising environmental tax measures and presenting the results in an environmental assessment table. We expressed our disappointment with the Government's appraisal work and our hope that this would be improved in the forthcoming Budget following the further review being undertaken by the Government.[40] In the event we found that the Budget 1999 did not result in major changes to the Government's approach. The Budget report assured the reader that all potential Budget measures are subject to environmental appraisal. And, the environmental assessment table was developed to provide reference to other relevant policy initiatives and to the draft sustainability indicator affected by the measure, but the key columns on the policy objective (previously referred to as the environmental function of the measure) and the environmental impact were not changed in a substantive way.[41] As our witnesses said, the table "has a nice logic to it" but provides only headline information.[42]

37. The Economic Secretary told us that the Government takes environmental appraisal very seriously. She described the information in the table as the tip of the iceberg, with a huge amount of work underpinning it.[43] She said that the environmental appraisal work is carried out in line with the Government's published guidance[44] and that impacts upon income distribution and competitiveness are also appraised.[45] In response to further questions on environmental appraisal she suggested to the Committee that if it felt it wanted more information on particular measures it should let her know and she would supply it[46] and that the Committee should set out specific questions and the format in which the material should be presented and that the Government would then do its best to provide it.[47]

38. In response to this the Committee has undertaken some further consideration of the value of environmental appraisal of Budget measures, the key elements to it and what should be made publicly available as set out below. In doing so we take the point made by the Centre for Social and Economic Research on the Global Environment and Drs Hogg and Speck, from environmental consultants ECOTEC, that the sophistication of appraisal of environmental tax measures should be seen in context, against the background that appraisal of other environmental policy measures and policy more generally is also not exemplary.[48] Certainly it is not the intention of the Committee to recommend uniquely high standards for the appraisal of environmental tax measures which could lead to these measures facing a higher hurdle than alternative instruments. The Committee has recently urged improvements generally to environmental appraisal of policy.[49] It seeks here to add to those recommendations points of particular concern in the appraisal of tax measures.

The value of environmental appraisal of Budget measures

39. Environmental tax measures can be introduced to achieve four different but not necessarily mutually exclusive purposes: to ensure that polluters pay for environmental costs they impose on society; to fund environmental protection measures or capacity building measures; to introduce incentives to more environmentally benign behaviour; and to provide revenue to allow for the reduction of other less efficient taxes.[50] From the outset it is important that it is clear which of these purposes an environmental tax measure is designed to address so that it is appraised for its ability to deliver against those particular objectives.

40. In relation to tax measures appraisals are often referred to as "ex ante", that is appraisals undertaken as part of the policy development process before the policy is introduced, and "ex post", that is appraisals, or evaluations, undertaken after implementation of a measure to assess how it is working. Professor Smith helpfully outlined for us three key reasons for undertaking ex ante appraisals of possible measures:

  • to enable the selection of the best instrument for the task;
  • to get the details of the measure right, in particular the right rate of tax so that costs and disruption are minimised; and
  • to be able to demonstrate that the measure is sufficient to meet external requirements, such as climate change targets.[51]

Ex ante appraisal also establishes a baseline against which the actual impact of the measure can subsequently be evaluated. Ex ante appraisal work by definition requires the forecasting or modelling of likely responses to new measures and the inherent difficulties this entails. Professor Smith acknowledged these difficulties but urged that whilst such appraisals cannot provide information on exactly what the map of the future world is going to be, they can tell us things about probabilities and likelihoods and should be undertaken because they provide the best evidence available as to the likely impact of policy measures in the future.[52]

41. On ex post appraisals Professor Smith outlined their value as being to learn from experience, both for national purposes and for the benefit of other countries considering introducing such measures; and to enable adjustments and fine-tuning to the policy.[53] Drs Hogg and Speck also drew the Committee's attention to four benefits addressed in OECD literature on the subject:

  • to improve administration of the measure;
  • to improve the future choice of policy instruments;
  • to provide evidence on the functioning of the political and policy process leading up to the adoption of the measure; and
  • to provide a basis for communication with stakeholders.[54]

They placed particular emphasis in their evidence on the value of ex post appraisal for identifying factors underlying behavioural responses to a measure and unintended consequences.[55] In oral evidence Dr Hogg further stressed the importance of learning from experience at a micro level of how the measure actually works and influences behaviour, with a view to where necessary revisiting the case for or adjusting complementary measures.[56] He also stressed the value of using ex post appraisal to adjust any ex ante model, so that further forecasting is improved.[57]

Outline of best practice and related assessment of recent practice

42. As Ms Hewitt told us, and Professor Smith endorsed, the Government's environmental appraisal guidance provides a good outline of what approach is required for the appraisal of tax measures.[58] In general terms Professor Smith considered the Government has been undertaking appraisal of environmental tax measures with the intention that it will be done sincerely and effectively.[59] He pointed to a number of examples where he considered good work had been done, namely the last Government's work on the landfill tax and the use made of energy modelling work in developing the energy tax proposals.[60] And overall he considered that the UK came in the "mid to upper range of good practice" in respect of the evaluation of policy measures generally, pointing to the Netherlands and the US as countries in which evaluation was most systematically embedded. None-the-less Professor Smith considered that it is early days, there are things that can be learned and a lot more that can be done. He noted that the OECD has been trying to encourage Governments to do more appraisal of market mechanisms in environmental policy because it thinks that a lot more can be learned.[61] From the perspective of a consultant who had worked for the Government on ex ante appraisals, Dr Hogg particularly drew attention to what he saw was evidence of "no great concern to carry out thorough policy evaluations", although he noted that this was also the case more generally, that is not just in the environmental field.[62]

43. In the light of this we explored further the key elements of best practice for environmental appraisal of Budget measures, drawing on our discussions with witnesses, evidence from the Government's Pre-Budget Reports and Budgets and memoranda to the Committee, and in particular evidence from the Government in respect of the Fuel Duty Escalator, which we had sought by way of an example of a policy for which only limited policy appraisal documentation was in the public domain.

Lessons for ex ante appraisal

(i) Appraisal should be undertaken where significant (materially or politically)

44. Despite the Government's general commitment to environmental appraisal we have noted a number of examples where there is little evidence of such appraisal. The Government raised the Fuel Duty Escalator in its first Budget, in July 1997, from 5 to 6 per cent in real terms with the explanation that this was in recognition of the environmental and other costs attached to road use. The Government gave an estimate that annual six per cent real increases in fuel duty over the lifetime of the Parliament would result in carbon savings of 2½ million tonnes a year by 2010.[63] The Government's memorandum did not point the Committee to any further appraisal documents supporting this decision.[64] Most of the large new environmental tax measures since that date have been the subject of appraisals which have been in the public domain. But we, and a number of organisations providing evidence to us, noted that the Budget 1999 had included no obvious environmental appraisal of measures not labelled as environmental taxes. Examples are the increase in cold weather payments, the deregulatory drive to be carried forward by the Better Regulation Task Force under Lord Haskins, the Research and Development Tax Credits and the establishment of the Small Business Service which could be set up with sustainable development as an integral part of its remit. We would expect all Budget measures to be subject to environmental appraisal, and for this appraisal to be in accordance with the points addressed below.

(ii) Appraisal should be undertaken at all appropriate points in the development of policy

45. We note that ex ante appraisals are designed to answer a number of questions and a single exercise can encompass any subset of these depending on the particular circumstances. In our view it is important that at each stage where a decision is taken, on whether to introduce a tax or on key design features, that decision should be supported by appropriate appraisal.

46. In the case of the Climate Change Levy Lord Marshall was asked to report on whether, and if so how best, to use new economic instruments to improve the industrial and commercial use of energy to help reduce emissions of greenhouse gases. He reported in November 1998[65] and the Government announced its decision to introduce a levy in the March1999 Budget report, with further consultation on some, but not all, design issues launched at that time. The Government has not made available an environmental appraisal supporting its Budget 1999 outline decisions on the Levy, although not all of these drew directly from Lord Marshall's conclusions or were explained in the consultation document. As Dr Hogg pointed out it is not now clear whether these decisions are firm or whether they are in practice open to consultation.[66] We will not know until final decisions are unveiled and it will be important at that time for all aspects of the Levy and the Carbon Trust to be supported by appropriate appraisal of their objectives and expected contribution to the policy objective.

47. The approach taken for the Climate Change Levy has contrasted with that applied to a possible pesticides tax, where an initial appraisal of possible economic instruments to minimise the environmental impacts of pesticides was completed in November 1997 and followed by consultation. A further appraisal of alternative possible designs for a tax was published in March 1999 [67] and is also now open to consultation and the Government will then take a decision on the principle of whether to introduce a tax in the light of these further consultations.

(iii) Options should be fully appraised, including the "do nothing" baseline

48. As English Nature set out in its memorandum, in common with most policy appraisals to date, the Budget 1999 simply set out the environmental effects of the preferred approach rather than showing the options considered and demonstrating that the best was selected.[68] Drs Hogg and Speck pointed out that tax measures are often best used in conjunction with regulatory measures.[69] Given the traditional view of these being alternative measures, we consider there is merit in the appraisal of the tax measure addressing its context and role, and distinguishing this from other measures which address associated environmental issues, and assessing the complementarity of the package of measures. The appraisal should also address different options for thresholds and rates for the tax. We consider that together this approach would help in preempting or at least informing arguments about alternatives. For example the Automobile Association's argument in relation to taxation of motoring, which says that the measures are not needed because there are other better means of reducing CO2 emissions.[70]

(iv) Appraisals should involve quantification where possible, with the methodology fully explained

49. Quantification of impacts is helpful for addressing all of the purposes of ex ante appraisal set out in paragraph 40 above. Yet it is clear from our discussions with Professor Smith and

Dr Hogg that this is likely to be the area of greatest difficulty.

50. Our witnesses drew attention to the difficulties caused by a lack of directly relevant historical experience on which to draw or by inadequate basic data.[71] There may also be some lack of understanding of likely behavioural responses to taxation and difficulty in incorporating in any modelling the complex impacts of other policy measures also affecting the outcome.

Dr Hogg added that in some cases the lack of data and the lack of understanding of likely responses meant that trying to model possible outcomes can stretch the credibility of the exercise, citing the Landfill Tax upon its introduction as a case in point, where modelling would have been incredibly difficult.[72]

51. Professor Smith argued that these difficulties did not detract from the essential value of undertaking appraisal and attempting quantification of impacts where possible. He said that if you use relatively simple models you must accept that things may not turn out exactly like you expect. But that appraisal work can help narrow down the range of possibilities and in some areas where there is no useful past experience to draw on you can do what you can to build up a model based on what the likely responses might be. This will result in ex ante appraisal for different measures being tackled in different ways and with different degrees of precision in the results.[73] He argued that this also supported the case for encouraging a range of studies on a measure, because the evidence from them is actually quite convergent,[74] although we note this may not always be the case.

52. Dr Hogg expressed reservation about basing a decision to proceed with a tax solely on the assumption that the tax could be set at an optimal rate to achieve a perfect market for the good, incorporating its environmental costs as well as traditional resource and production costs. He pointed to the fact that valuation factors for an individual pollutant can vary by as much as 25 fold and that for some impacts the uncertainty of the valuation is too great to attach any real significance to it. He also considered this approach could lead to the exclusion from consideration of any factors which ultimately could not be valued, such as ethical considerations and rights based debates. In Dr Hogg's view in the case of the Landfill Tax this valuation approach had resulted in a tax rate well below what was expected and this has subsequently been raised to increase the impact of the tax.[75] In the case of a possible Aggregates Tax valuation of environmental costs has fuelled a lot of discussion about the methodology used but has not answered the central questions of whether, how and if so by how much a tax would contribute to the policy objectives of reducing the use of primary aggregates and increasing the use of recycled aggregates. As an alternative to this approach Dr Hogg advocated that the appraisal should address the question of how to deliver the change needed to meet an environmental target.[76] This had been adopted in the development of the case for a pesticides tax, undertaken for the Department of the Environment, Transport and the Regions by ECOTEC. This started from the position that the tax should be designed to address a range of policy objectives, most particularly to reduce pesticides use and to achieve substitution to less harmful pesticides or alternative techniques.

53. We have noted that whilst the Government has made reasonable attempts at quantification of impacts for its major environmental tax policies, such as the Climate Change Levy, there has been little evidence of this in the Treasury's reports for a number of smaller measures or changes to measures. We consider that for small measures this is still important to help those affected understand the case for the tax and its expected impact. For example there is no quantification to support the Budget 1998 decision to provide an exemption from the Landfill Tax for inert wastes used in the restoration of landfill sites and the infilling of quarries. This is a concern because the exemption may result in less incentive to find alternative, more productive, uses of the waste for example as an alternative to primary aggregates. The Budget1999 did not involve any quantification of impacts to support the decisions to reduce duty on road fuel gas, set a threshold for a lower rate of vehicle excise duty for small cars at 1100cc and increase the discount from vehicle excise duty for less polluting lorries and buses from £500 to £1000, and although the impact of changes to taxation of company cars was estimated the Budget documents gave no explanation of the methodology used. In the case of the lower rate of vehicle excise duty on cars this was particularly surprising in the light of the fact that the threshold chosen was different from the illustrative one which had been subject to consultation. This failure to provide quantified information contributes directly to charges such as that from the Automobile Association that the Government had set the low rate for an "apparently arbitrary choice of engine size".[77]

54. In the light of these concerns we were frankly disappointed by the Economic Secretary's response that wherever they had been able to quantify or run different options on models they had done so, but in these cases they had not been able to do so for example because the expected take-up was too small to model.[78] Clearly this was not strictly the case. In the case of reduced duty on road fuel gas the Economic Secretary told us of an independent forecast that the British market for liquid petroleum gas used in road vehicles is likely to experience average annual growth of over 60 per cent between now and 2008, in line with the predicted increase in the number of gas fuelled cars on British roads to 500,000, and that the main incentive for that is the duty differential.[79] In the case of vehicle excise duty she told us that about 1.8 million drivers are expected to benefit from the new rate of duty for cars smaller than 1100cc. Whilst it is likely that the impacts of these measures will be small we consider the Government's appraisal should at the least set out their likely scale.[80]

(v) The incidence of a tax should be appraised, by sector, with consideration of effects on income distribution and competitiveness

55. In evidence to the Committee the Economic Secretary assured us that appraisal takes account of income distribution and competitiveness effects.[81] These issues are likely to be the most controversial in any proposal and so the way in which they are handled will be key to the success of the measure and we consider a more rigorous approach is required.

56. In the most recent appraisal, of a pesticides tax, the consultants analysed the possible impact of the tax on farms' profitability and this is likely to be the subject of much of the feedback in the consultation currently underway on this possible tax measure.[82]

57. In the case of the Climate Change Levy Lord Marshall explicitly addressed the impact of a tax on the energy intensive sectors. However, Dr Barker considered that given the importance of the point it would be good to have more information on competitiveness. He believed the Government tends to rely on other people's work on this and said that there was no evidence that it had used the Department for Trade and Industry's model to look at the effect of the climate change levy on competitiveness.[83]

58. In the case of the Fuel Duty Escalator the Government did not produce any public statements on distributional and competitiveness effects. The Department of the Environment, Transport and the Regions reported to us that it keeps under review any unintended consequences and has increasingly sought to evaluate the distributional impacts of its policies. It told us, however, that it is up to the Treasury to make a full assessment of the range of tax measures introduced in any one Budget.[84] We have seen no evidence from the Treasury taken from this type of analysis.

(vi) Mitigation and complementary measures, including those to be funded out of tax revenues, should be appraised alongside the main tax measure

59. In our last report we briefly considered the merits of hypothecation, whilst concluding that any such proposals should be subject to rigorous appraisal to ensure that they do not result in new distortionary subsidies.[85] In evidence to this inquiry English Nature, the Environment Agency and various non-government organisations expressed their support for hypothecation in appropriate circumstances.[86] English Nature called specifically for the Treasury to amend its Statement of Intent on Environmental Taxation to set out the Government's view on the broad circumstances where hypothecation of revenues from environmental taxes may be appropriate and to give early indication in its consultation exercises of how revenues will be used.[87]

60. Despite the obvious benefits of holistic appraisal, including the appraisal of the use of tax revenues, we have observed that this practice has often not been followed. In the case of the Climate Change Levy Lord Marshall included his "impressions" of the merit of the main proposals made to him for how the revenues should be recycled to business and recommended that "at least some of the revenues are channelled into schemes aimed at promoting energy efficiency and reducing greenhouse gas emissions directly".[88] The Economic Secretary told us that the Government had wanted to return the overwhelming bulk of the revenue to business through tax cuts. She said that "the £50 million fund for both energy efficiency and renewables could, for instance, permit a doubling in the support that is specifically given for advice on energy efficiency. If there are proposals to vary the £50 million by some small amount the Government would look at those very sympathetically".[89] This explanation does not sound as if it derives from as full an appraisal of potential impact as one would expect of an important element of a significant tax. Likewise the most recent pesticides appraisal work focussed on the design of the tax. Although this reported that there would be merit in making use of the revenue from the tax to support the incentives of the tax and reported ideas for such complementary measures this was not an integral part of the options subject to full appraisal.[90] It has therefore been left to subsequent appraisal work to assess the scale and nature of any such complementary measures. And on aggregates there has as yet been no discussion of the likely use to which any tax revenues would be put.

(vii) The sensitivity of the estimated impact of the measure should be formally appraised

61. Given the difficulty of producing precise estimates of the likely impacts of a measure it is important to consider the sensitivity of the results to changes in assumptions in the model and input data. From the information available to us we find it difficult to judge the sensitivity of the estimated environmental impacts for the two really large measures presented in the Government's environmental assessment table in the Budget 1999, the Climate Change Levy and the Fuel Duty Escalator. This is critical because of the importance of these two measures to meeting the legally binding Kyoto Protocol targets.

62. The Government estimates that the Climate Change Levy with the proposed revenue take of £1.75 billion will result in carbon savings of 1.5 million tonnes a year by 2010. This is said to be based on Lord Marshall's report, which included the estimate of carbon savings of 1 million tonnes assuming a tax take of £1 billion, based on modelling by the Department of Trade and Industry using its energy model. Lord Marshall also quoted the Cambridge Econometrics modelling which shows carbon savings would be of the order of 70 per cent higher.[91] As Dr Barker told us, sensitivity analysis is a complicated exercise but it can be done and is done by clever companies in their business planning. In the case of the Climate Change Levy it would look at the robustness of the estimates to changes in growth rates and this would have given a better feel for what the risks and benefits might be, with the advantage of giving more information and helping business plan for change.[92]

63. The Government estimates that the Fuel Duty Escalator operating over the committed period of 1996 to 2002 will produce carbon savings of 2 to 5 million tonnes a year by 2010.[93] The Department of the Environment, Transport and the Regions explained to us the complexity of its traffic model and the large number of variables involved, from the price of crude oil, through changes in the nature and growth rate of the economy, to shifts in the type of vehicles on the road and added that there were a number of variables not currently included which were being investigated for possible inclusion, such as the impact of rising incomes on road users' responses to fuel price increases. It told us that in the light of the number of these variables no sensitivity analysis in its formal sense has been carried out, with the Government relying instead on showing the range of possible impacts, based on two different models, its own traffic model which forecasted carbon savings of 2 million tonnes and the Department of Trade and Industry's energy model which forecasted carbon savings of 5 million tonnes.[94] It was interesting that the simpler model produced in evidence to us by the Centre for Social and Economic Research on the Global Environment estimated much higher levels of carbon savings on the basis of different estimates of the elasticity of motor fuel consumption to changes in real prices.[95] This illustrated to us the importance of Government undertaking sensitivity appraisal work and reporting it with more detail on the methodology used to assess likely environmental impact, so that those expert in the field can examine the differences in approaches and resulting estimates to establish whether they throw doubt on the Government's ability to meet its overall commitments.

64. As Professor Smith said the danger when producing forecasts with a single estimate is that undue reliance is placed on them and the uncertainty is not fully taken account of in policy. In respect of the Fuel Duty Escalator he added that he thought it unlikely that at a research level they would not have investigated sensitivity. He thought there may be reasons why the Government may be reluctant to publish such information, although he did not accept them.[96]

(viii) Responsibility for ex post appraisal should be clarified at the outset

65. As set out in the Government's guidance on environmental appraisal it is important to make sure that appropriate arrangements are in place for effective monitoring and evaluation, to address this requirement early in the appraisal process, and to consider what is the appropriate timing for the evaluation.[97] We have found no evidence in appraisal documents of budget measures from this Government that this has been formally addressed. The Economic Secretary told us that the Government monitors the impact of taxes on all environmental indicators and that in relation to the Climate Change Levy and the road tax package it will be done as part of the continuing climate change strategy.[98] The Department of the Environment, Transport and the Regions told us that it, the Department of Trade and Industry and the Treasury have a common interest in assessing the impacts of the Fuel Duty Escalator and that estimates are kept under review. It also said that the Government expects to publish an environmental appraisal of its environmental tax measures on an annual basis.[99] From this we infer that if this review of estimates led to a change in the forecasts of impacts this would be reflected in the Budget environmental assessment table. Whilst in some degree reassuring we consider that these responses do not amount to commitments to thorough, rigorous ex post appraisal.

(ix) There should be appropriate consultation, allowing stakeholder input before key decisions are taken

66. It is particularly important to include consultation as part of the appraisal of budget measures given the difficulty of calculating precisely the expected incidence and environmental impacts and yet the importance of getting the proposed measure broadly right. We therefore welcome the formal commitment the Government has given to consultation in the recent Treasury code of practice, whilst noting that the Government has reserved for itself the right not to consult where it considers this appropriate.[100]

67. We consider that for the major Budget measures the Government has introduced or proposed the degree of consultation has been a strength of its approach. As Dr Hogg noted the pattern has generally been for the Government to take a fairly thorough view of what is going on and then put the matter out to consultation, although he thought the example of the Fuel Duty Escalator might have been an exception to this.[101] Dr Barker considered this Government had pursued an approach which involved a "very great improvement in consultation with business and with other interested parties".[102] He and Mr Hewett both considered that there had also been evidence of good cooperation between departments in the preparation of the Budget.[103] We received further positive comments on the extent of the Government's consultation on Budget measures from others.[104]

68. However, we have also noted that other smaller budget measures have not been subject to consultation, for example those set out in paragraph 53 except the change to vehicle excise duty for cars. We do not consider that the likely small impact of these measures is sufficient reason not to consult, since apparently small changes can sometimes be mis-specified and can have unexpected or undesirable results. If the measures are likely to be uncontentious there is no harm and there is unlikely to be much work generated from opening them up to consultation as a check of the Government's assessment, and in this respect we would urge the Government to widen its presumption to consult to include smaller as well as larger measures.

Lessons for ex post appraisal

(i) Measures should be appraised shortly after implementation to check ex ante expectations and identify teething problems

69. Both our expert witnesses stressed to us the value of undertaking appraisal shortly after the implementation of a measure. Professor Smith told us that after 12 months or so it may be difficult to see responses to the policy measure, but there may be useful lessons to learn about the way a particular policy has been operated, about administrative costs and complexity and anecdotal stories about the way in which operators have responded to the measure.[105] This feedback would be useful in considering whether small changes to the measure were needed.

Dr Hogg considered that early review would allow you to look at what taxpayers' intentions are, so that you can then later revisit them to see whether the intentions have been followed through. He considered this was valuable to help in understanding the influences of specific instruments and the case for complementary measures to generate more positive environmental response to the tax measure. He considered that this sort of micro analysis was therefore a useful complement to macro analysis which looks at the overall data, for example, to establish whether consumption has been affected by the measure.[106]

(ii) The impact of measures should be formally appraised as soon as this is possible

70. The challenge in undertaking ex post appraisal is to identify evidence of a long-term change in the behaviour targeted by the measure and to disentangle the impact on this behaviour which results from the measure itself rather than other influences. For policy reasons there is advantage from early feedback, but the appraisal of impact has to be left as long as necessary to allow this real evidence of impact to show through. Professor Smith illustrated this with respect to the responsiveness to changes of energy prices. He estimated that most energy-using equipment would have a life span of some 15 years and therefore that half of it would have been replaced in seven years. He therefore considered you would only be able to confirm trends in investment decisions, that is the purchase of more energy efficient equipment, after say five, six or seven years. He considered that some policies designed to have shorter-run effects could be evaluated two to three years after implementation.[107]

71. In respect of the Fuel Duty Escalator the Department of the Environment, Transport and the Regions stressed that it is a long-term measure and that by 2010 it should have a much more accurate picture of events, although even then the precise impacts of the escalator will be difficult to isolate.[108] Professor Smith agreed that in this case, given that there are already reasonably soundly based estimates of how fuel consumption responds to price, there is little to be learned from each extra year's worth of actual data. But he considered there were things you could learn sooner than 2010. In two to three years it could be possible to see the response of motor vehicle manufacturers to fuel prices. And before 2010 there would also be a need to assess whether the policies in place are sufficient to meet the Kyoto targets.[109] We certainly believe that it should be possible to detect any changes in vehicle ownership patterns and driving behaviour due to the tax compared to baseline forecasts well before 2010.

72. In the light of these discussions about the timing of ex post appraisal and our concern about the apparent lack of ex ante appraisal of the introduction of the exemption from tax for inert wastes used in the restoration of landfill sites, we were pleased to learn that ECOTEC are already undertaking a study for the Department of the Environment, Transport and the Regions on the impact of the Landfill Tax on inert wastes.[110]

(iii) The Government should encourage a variety of ex post appraisals

73. As we have argued in the ex ante case, paragraph 51, we see advantage in encouraging a variety of ex post appraisals, using different methodologies to build up a more rigorous analysis of actual impacts. Professor Smith pointed us to the fact that there are both advantages and disadvantages from the Government undertaking ex post appraisals of its measures itself. He considered that internal assessments had the advantage that they are carried out by people who are well-informed, have access to good information and who as a result of having carried out the appraisal feel ownership of the results. He stressed the importance of the latter in getting the evaluation translated into effective modification of the policy. On the other hand he also pointed out that internal appraisals can turn into a justification for what was going on. This is avoided if the work is carried out independently.[111] He concluded it was helpful to try to stimulate a broad base of research on these issues, within and outside Government, for example in the academic community. He considered this would provide a credibility check on the work done.[112]

Publication of environmental appraisal work

74. In addition to encouraging diversity of research on economic measures, and indeed in support of that, both Professor Smith and Dr Hogg stressed the importance of the publication of appraisals and greater transparency. The commitment to publication provides a deterrent against partial internal appraisals and in putting the detail of appraisal work in the public domain allows others with an interest in this complex area to unpick the methodology and subject it to appropriate challenge.[113] For example Dr Barker told us that better information would be needed for third parties to be able to assess the reliability of the Government's estimates of the likely impact of the Climate Change Levy.[114]

75. We also consider that more information on the calculations behind the Climate Change Levy would have helped understanding of the impact of the proposals for including or exempting renewable energy from tax. Furthermore, we consider publication of appraisals also brings value through helping those affected by the tax to understand the incentives it is intended to give, the responses which are favoured and hence perhaps to reinforce the behavioural impact of the tax. For example, with the fuel duty escalator it may serve to remind people of the benefits from considering fuel efficiency when purchasing a vehicle and fuel efficient driving habits as well as the more obvious benefit of reducing their mileage. And, Dr Barker added that secondary benefits could also usefully be given in more detail to show that there are other benefits beside the immediate ones.[115]

76. In our earlier reports we have been critical of the level of appraisal information published by the Government in its Budget documents[116] and this has not significantly changed. English Nature consider that at this summary level what is required is information showing the baseline against which the policy change is being considered, the predicted outcome without the policy measure and the predicted outcome with the policy measure.[117] For major measures detailed ex ante appraisal work has often been published which has included this level of information. In addition, as Professor Smith pointed out, often at a working level it is possible for people who are interested in the precise detail of particular approaches to modelling to go and talk at a technical level with those concerned.[118] However, there is a gap between this level of detail and the very limited information presented in the environmental assessment table in the Budget. This gap is at the level of information required to address each of the key elements of best practice as set out above, which is required by us and others, to audit the Government's approach and performance and to identify policy areas where change may be needed.

Conclusions and recommendations

77. As with other fields of Government policy making, there is room still for improvement in the environmental appraisal of budget measures in accordance with the Government's guidance and the procedures outlined in this report.

78. When appraising the case for an environmental tax measure the Government should not be over-reliant on identifying a rate for the tax that it is hoped will deliver a perfect market in the good. It is most important for the appraisal work to determine the outcome wanted, do the work necessary to identify likely behavioural responses, include positive complementary measures as an integral part of the appraisal and consider the incidence of the measure and distributional implications.

79. The Government should recognise the value of consultation on possible environmental budget measures for smaller changes as well as larger ones and where it has not consulted on the measure it should explain this decision as a matter of routine.

80. The Government should make a proper commitment to undertake full ex post appraisals of all Budget measures, and should report the intention and the likely timing of the review for each new or substantially amended measure when it is introduced.

81. The Government should ensure that the environmental assessment table in its Budget and Pre-Budget Reports includes the baseline against which the policy change is being considered, the predicted outcome without the policy measure and the predicted outcome with the policy measure. For smaller measures the predicted outcome may be couched in terms of the likely scale of the impact. This summary information should be fully referenced to more detailed supporting information, including an intermediate level, accessible publication setting out the key elements of the appraisal approach, results and conclusions and, where appropriate, a detailed technical paper.

82. There should be a periodic independent evaluation of the Government's approach to appraisal of Budget measures, and this could potentially be a part of the remit of a Green Tax Commission.

40   Op. cit. paragraph 18 Back

41   Op. cit. pp 82-85 Back

42   QQ4 and 37 Back

43   Q93 Back

44   Policy appraisal and the environment, DETR, 1998 Back

45   Q118 Back

46   Q94 Back

47   Q120 Back

48   Ev pp 37 and 55 Back

49   Sixth Report form the Environmental Audit Committee, The Greening Government Initiative 1999, HC 426, Session 1998-99, published 29 June 1999 Back

50   See for example, Ev p 87 Back

51   QQ157-158 Back

52   Q185 Back

53   Q159 Back

54   Ev p 51 Back

55   Ev p 52 Back

56   QQ194 and 206 Back

57   Q210 Back

58   QQ118 and 165 Back

59   Q166 Back

60   Q176 Back

61   Q167 Back

62   Ev p 54 Back

63   HM Treasury, Budget News Releases, 2 July 1997, Number 4 Back

64   Ev pp 68-69 Back

65   Economic instruments and the business use of energy, A report by Lord Marshall, November 1998  Back

66   Q214 Back

67   Design of a tax or charge scheme for pesticides, DETR, March 1999 Back

68   Ev p 78 Back

69   Ev p 52 Back

70   Ev p 63 Back

71   QQ160, 164 and 199 Back

72   Q211 Back

73   Q164 Back

74   Q185 Back

75   Ev pp 53-54 and QQ196-198 Back

76   Ev p 53 Back

77   Ev p 63 Back

78   Q101 Back

79   Q149 Back

80   Q141 Back

81   Q118 Back

82   Op. cit. Back

83   Q25 Back

84   Ev p 75 Back

85   Op. cit. paragraph 22 Back

86   Ev pp 79-80, 81, 91-92 and 111 Back

87   Ev p 80 Back

88   Op. cit. pages 25-26 Back

89   Q127 Back

90   Op. cit. pages 162-163 Back

91   Op. cit. page 58 Back

92   Q37 Back

93  Op. cit. page 84 Back

94   Ev pp 70 and 73-74 Back

95   Ev pp 36-37 Back

96   Q188 Back

97   Op. cit. Back

98   Q104 Back

99   Ev p 12 Back

100   Code of Practice on Consultation, July 1999, HM Treasury, Back

101   Q199 Back

102   Q14 Back

103   QQ10, 14 and 23 Back

104   Ev pp 79 and 86 Back

105   QQ170-171 Back

106   QQ204-206 Back

107   Q171 Back

108   Ev p 74 Back

109   QQ189-190 Back

110   Ev p 49 Back

111   Q172 Back

112   QQ174-175 Back

113   QQ173 and 207 Back

114   Q37 Back

115   Q40 Back

116   Op. cit. paragraph 18 Back

117   Ev p 79 Back

118   Q179 Back

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Prepared 27 July 1999