Select Committee on Environmental Audit Eighth Report


APPENDIX 1

GOVERNMENT MEMORANDUM TO THE ENVIRONMENTAL AUDIT COMMITTEE: RESPONSE TO THE COMMITTEE'S FOURTH REPORT ON THE 1998 PRE-BUDGET REPORT

The Government welcomes the Fourth Report of this Committee. The Committee continues to have an important role in the pursuit of cross-department environmental issues, and in holding departments to account on environmental policies. The Government's responses to the Committee's specific recommendations are covered below.

    (a)  The Pre-Budget Report made no start in using information already available to show how Government economic policies would deliver environmentally sustainable growth.

The 1998 Pre­Budget Report restated the Government's commitment to sustainable development. It included measures ­ either already in place or under consideration ­ aimed at promoting each of the four broad objectives of sustainable development :

  • social progress which recognises the needs of everyone;
  • effective protection of the environment;
  • prudent use of natural resources;
  • maintenance of high and stable levels of growth and employment.

Table 5.1 of the Pre­Budget Report showed the expected impact of the Government's environmental tax measures to date, and those under consideration. This assessment was developed further in the 1999 Budget documentation.

Table 5.1 of Budget 99 contained an environmental appraisal of those Budget measures whose aim was primarily environmental, or which are expected to have a significant environmental impact. Included in that table were references to relevant policy objectives, policy initiatives and the draft headline indicators of sustainable development which were published on 26 November 1998 (after the Pre­Budget Report).

    (b)  We recommend that the Treasury explore how they can use the results of the modelling already done by the Government, on climate change emissions, SO2 emissions, transport growth and construction aggregates extraction in their Budget documents.

As the Treasury's memorandum in response to questions raised at the hearings on 9 December 1998 and 14 January 1999 made clear, the relationships between economic growth and environmental factors are extremely complex. Economic growth can take place in different ways with different impacts on the environment.

Table 5.1 of Budget 99 does, of course, reflect modelling already undertaken in the estimates of the environmental impact of Budget measures. The table also refers to the Government's environmental targets and strategies, which are underpinned by modelling and forecasting work.

As the Committee recognises, the forthcoming Sustainable Development Strategy will set out further details on the Government's approach to achieving high levels of growth and employment, while at the same time protecting and where possible enhancing the environment. The Government is currently considering mechanisms for reporting on the indicators of sustainable development.

    (c)  We recommend that the Government should review the relationship between labour productivity and environmental and social factors and for the future present wider analyses of the productivity challenge facing the UK.

The Government agrees that measures to promote labour productivity should also have regard to environmental and social impacts. This is a key implication of sustainable development.

The Government fully recognises the need to promote environmentally and socially sustainable growth. It also accepts that labour productivity as a measure suffers from similar shortcomings as Gross Domestic Product. However, it believes that there are opportunities for enhancing both labour productivity and environmental performance, for instance by improving energy efficiency. Therefore, higher labour productivity and better environmental performance can go hand­in­hand and need not be seen as substitutes. The Government's aim is to secure high and stable levels of growth and employment while protecting and, where possible, improving the environment.

The forthcoming Sustainable Development Strategy will set out its principles and general approach, as well as views on the relationship between the different strands of sustainable development.

    (d)  We recommend that the Government consults on a scheme to promote investment in specified environmental technologies.

The possibility of introducing tax reliefs for energy saving technologies was one of the options discussed by Lord Marshall in his report "Economic instruments and the business use of energy". Lord Marshall noted that such tax reliefs could help support the development of existing fledgling technologies. But he was also concerned that such schemes might be complex to administer, both for companies and Government and could involve high deadweight costs. He also noted that, by specifying eligible technologies, they might stifle, rather than encourage, innovation.

The Government is, however, committed to encouraging innovation, including developments in environmental technology, and intends to introduce a volume-based research and development tax credit for small and medium sized enterprises. This will include those small firms involved in developing environmental technologies.

The taxation of polluting activities themselves should also encourage businesses to look for alternative technologies which are less polluting. Those firms in the environmental industry should then be able to use these signals to promote their own products and services. In addition, as made clear in Budget 99, the Government plans to allocate extra funds towards a "carbon trust" to develop new "low carbon" technologies.

    (e)  Although we recognise the difficulties associated with producing a Green Book showing the impact of the Budget as a whole on the environment and welcome the developments which have been made, we remain somewhat disappointed that the Government's analysis has not yet become much more sophisticated. We look forward to seeing the fruits of the Government's review of the form of its environmental assessment of the Budget in the 1999 Budget.

Budget 99 made significant advances in the Government's approach to the environmental appraisal of Budget measures. Table 5.1 in Budget 99 included an environmental appraisal of those Budget measures whose aim was primarily environmental, or which are expected to have a significant environmental effect.

Table 5.1 incorporated the draft "headline" indicators of sustainable development which were set out in the consultation document "Sustainability Counts", published in November 1998. This was done to improve the accessibility of the table to emphasize the role of the tax system in underpinning the Government's commitment to sustainable development. The table also included references to other policy initiatives and documents relevant to the policy measure.

The text associated with table 5.1 makes clear the Government's commitment to ensuring that environmental impacts are taken into account in assessing different policy options. Government guidance is clear that appraisal systems should take account of all environmental costs, and this requirement applies to all Budget measures. All potential Budget measures from the Chancellor's departments are subject to an environmental appraisal.

The Government will continue to consider how the environmental appraisal of the Budget might be further improved and developed, and would welcome any further views from the Committee on this issue.

    (f)  We consider there is no evidence that the Government is addressing the merits of environmental taxation in the context of improving the efficiency and effectiveness of the tax system as a whole.

Environmental taxes may improve overall economic efficiency to the extent that they internalise the externalities associated with environmental pollution. The Government is supportive of the "polluter pays" principle which says that the prices of goods and services should reflect the true costs to society. The application of the "polluter pays" principle ensures that externalities are internalised, and environmental taxes that enforce this principle therefore improve the economic efficiency of the tax system as a whole.

The Government firmly believes that environmental taxes are not an end in themselves. They are one way to meet environmental objectives. Other instruments, such as tradeable permits or regulation, can also be used to deliver environmental objectives. Often a mix of policy instruments will be most appropriate. In addition, the Government's Statement of Intent on Environmental Taxes makes clear that environmental taxes, or changes to the existing tax system to achieve environmental objectives, must pass the general tests of good taxation.

Budget 99 includes the largest and most far-reaching package of environmental tax reforms ever seen in this country. A good example of where the Government is using the tax system to put the "polluter pays" principle into practice, and improve the efficiency of the tax system as a whole is provided by the climate change levy. The Government intends to recycle the revenues to business primarily through a cut of 0.5 percentage points in the main rate of employer National Insurance Contributions, so leaving the overall burden of taxation on business unchanged.

    (g)  It appears to us that hypothecation of some of the revenue from a tax is helpful in making new tax measures more acceptable to those paying the tax. However we would support the Treasury in applying their usual rigour to consideration of such proposals to ensure that they do not result in new distortionary subsidies.

As the Committee recognises, the Government determines its expenditure according to need, not according to the sources of its revenue. Taxes should be applied where most appropriate and where least harm will be done, for example, environmental taxes should be applied where they help meet environmental objectives and meet the general tests of good taxation. The revenues generated from these taxes should be used where they will do most good, which means that, in general, government expenditure must be prioritised in the round.

The Statement of Intent on Environmental Taxation makes clear that the Government expects, over time to shift the burden of taxation from "goods" to bads". The introduction of the climate change levy will, in line with the recommendations made by Lord Marshall make a significant contribution in this regard. It will involve no increase in the overall burden of taxation on business. The Government intends to recycle the revenues to business through a cut of 0.5 percentage points in the main rate of employer National Insurance Contributions. Businesses will also benefit from an additional £50 million for schemes aimed at promoting energy efficiency and support for renewable sources of energy. This will help shift the burden of taxation from employment to the emission of greenhouse gases and encourage the development of new technologies.

In the case of road user charging and workplace parking charges, the Government has proposed local authorities bringing forward approved pilot schemes will be allowed to retain 100% of revenues for at least 10 years provided there are worthwhile transport projects to fund. This will ensure:

  • complementary improvements to public transport;
  • charging is fair on communities;
  • that distributional impacts are not regressive;
  • that local authorities with a sharper incentive to introduce schemes.

There should be no presumption that the approach taken with either the climate change levy or some transport measures is appropriate for other environmental taxes. The Government will continue to consider each case on its merits.

    (h)  We recommend that the environmental tax measure developed by the Office for National Statistics should be reported in all of the Government's economic documents.

The memorandum submitted in response to questions raised at the hearings on 9 December 1998 and 14 January 1999 explained the definition of "environmental tax" used in the article in the October 1998 edition of "Economic Trends", published by the Office for National Statistics (ONS). The definition was agreed at an Expert Workshop organised by the European Commission, Eurostat, International Energy Agency and OECD, held in March 1997.

That article, whilst noting the limitations of this common definition, applied it to United Kingdom data and showed that in 1997, some 9.1 per cent. of total taxes and social security contributions came from environmental taxes.

The Government does not believe there is a "correct" burden of taxation that should be raised by environmental taxes. Setting explicit targets could lead to undesirable distortions in the tax system as a whole, and restrict the freedom of the Chancellor to design a tax system to achieve a wide number of objectives.

Moreover, it is not clear that an increase in environmental tax revenue is necessarily a good thing for the environment. Such a simple indicator cannot capture the variety of ways in which the Government can use the tax system to help reduce environmental damage, such as fuel duty differentials, and tax credits for positive environmental expenditure, such as the ENTRUST scheme.

The Government does not therefore consider it appropriate to publish an aggregate measure of environmental taxation in all its economic documents. However, it will keep the position under review. The Committee might like to note that the ONS intends to publish the updated information on environmental taxes as part of a separate chapter on environmental accounts in the 1999 Blue Book.

    (i)  In our view the advantage of an independent group, or a Green Tax Commission, is that it can take up new tax issues, provide a focal point for research and submissions from stakeholders and the public and work to a definite timetable which can be linked in to the Pre-Budget and Budget rounds.

The Government's approach has been to take forward the environmental tax agenda in a consultative way, listening to the views of all interested parties and trying to build consensus where possible on the best way forward. To this end, the Government has conducted extensive consultation with interested parties on a number of environmental tax issues.

This open and consultative approach was continued in the 1999 Budget. For example:

  • the Government has published the research on a possible tax on pesticides and is seeking views on the issues raised in the report;
  • views are also being sought on the fundamental reforms to company car taxation announced by the Chancellor;
  • a consultation document on a number of technical issues relating to the administration of the climate change levy was also published on 9 March.

The Government will continue to keep the case for a Green Tax Commission under review. It is not clear at this stage, however, what a body such as a Green Tax Commission would add to existing arrangements, and to the large number of bodies that already advise the Government on environmental and sustainable development issues.

    (j)  We look forward to the announcement of a decision, to give a clear signal on the long term direction of policy, in line with Lord Marshall's conclusions on the business use of energy.

The Chancellor announced in the Budget that a climate change levy on the business use of energy will be introduced from April 2001. The design of the new levy follows closely the recommendations made by Lord Marshall.

The levy will entail no increase in the overall burden of taxation on business, since the revenues will be recycled in full to business. The Government intends to cut main rate of employer national insurance contributions by 0.5 percentage points. Business will also benefit from additional £50m for schemes aimed at promoting energy efficiency and support for renewable sources of energy, like solar and wind power.

The Government also recognises the need for special consideration for energy intensive industries given energy usage and exposure to international competition. Significantly lower rates of tax will be set for those energy intensive sectors that agree targets for improving their energy efficiency, whether by voluntary means or emissions trading. In this way, the advantages of different policy instruments for different sectors can be harnessed to improve energy efficiency and reduce emissions. The tax change is also being pre­announced by two years in order to give businesses time to adjust.

This reform represents a shift in the balance of taxation, in line with the Statement of Intent on environmental taxes. The new levy is expected to reduce emissions by around 1.5 million tonnes per annum by 2010, thereby making a significant contribution to meeting the UK's climate change targets. The additional support for schemes aimed at promoting energy efficiency and support for renewables will help promote new technologies, while the cut in employers National Insurance Contributions will encourage employment opportunities.

    (k)  In response to a request from Government Ministers the Quarry Products Association put forward, in November 1998, a ten-point plan to deal with the environmental impacts of quarrying. It is encouraging that an industry can produce such a significant package of environmental measures in the face of the threat of taxation, but we would urge the Government to address the matter with care.

The emerging results from the research into the costs and benefits of the extraction of aggregates suggest that there are significant environmental costs arising from the supply of aggregates. The Government believes therefore that there is a case, in principle, for a tax on the extraction of aggregates.

However, before coming to a final decision on whether to introduce a tax, the Government will first pursue the possibility of an enhanced package of voluntary measures with the quarrying industry. The Government considers that the industry's initial proposal for a voluntary package (published in November 1998) falls short of what is justified by the environmental costs of quarrying. Should the industry not be able to commit to an acceptably improved offer, or should it fail to deliver an agreed package of voluntary measures, the Government will introduce an aggregates tax.

The Committee's report (paragraph 42) quotes Brunner Mond (UK) Ltd as saying that Government departments realised only in Autumn 1998 that an aggregates tax would hit also those companies using aggregates as minerals. In fact, Customs were already conducting fact finding visits to industrial minerals sites as early as December 1997. Furthermore, the Customs consultation document, issued in June 1998, made reference to industrial minerals such as silica sand, and requested views on their appropriate tax treatment.

At the time of the 1999 Budget, the Government made it clear that minerals used for industrial purposes would be excluded from the scope of any aggregates tax at the outset.

The Government intends to expose for comment draft legislation for an aggregates tax in April this year, along with a summary of replies to the Customs consultation.

    (l)  The Economic Secretary said that although the Treasury and the Department of the Environment, Transport and the Regions were working closely on the question of water charges, she had no knowledge on the link with the review of prices by OFWAT, which was the responsibility of the Department of the Environment, Transport and the Regions. This points to the need for better coordination of these policies.

Both the OFWAT Periodic Review of Water Prices for the years 2000-05 and the Government's recent review of water charging are matters dealt with by Ministers in the Department of the Environment, Transport and the Regions.

The OFWAT Periodic Review is concerned with the overall level of charges which water companies will be allowed to raise from their customers over the next five years. At the conclusion of the review, the Director General of Water Services will determine new K factors which will set for each year of the period and for each water company the maximum permissible increase - or the minimum decrease - in average prices above or below the RPI.

In contrast, the Government's review of water charging is concerned with the distribution of those average charges among different groups of customers, particularly in the household sector. The outcome of the review was announced in November, and a Bill - The Water Industry Bill - is currently before Parliament. Among other things, the Bill would give the Director General new powers to control how charges for individual customers are calculated within the overall limits set in his periodic review.

The Department of the Environment, Transport and the Regions and the Office of Water Services are working closely together to ensure that the outcomes of the two reviews are consistent and properly co-ordinated. In particular, Ministers in the Department recently announced their detailed decisions on the environmental and drinking water quality improvements which will be imposed on the water industry during the period 2000-05. These decisions are a major input into the Director General's work on the companies' investment programmes for the Periodic Review period. The quality of the water environment has improved considerably in recent years, and the decisions taken as part of the Periodic Review will deliver significant further improvements over the next five years.

    (m)  We urge the Government to publish the results of its work on taxing fertilisers, pesticides and point sources of water pollution and to make clear the current stage in its thinking.

A research report, commissioned by the Department of the Environment, Transport and the Regions, on the possible design and impact of a tax or charge on pesticides was published on 24 March. The Government is seeking views on a number of issues raised in the report in deciding how best to proceed.

The research on the practicalities of a tax or charge for water pollution discharges, commissioned by the Department of Environment, Transport and the Regions, will be published shortly. Budget 99 said that the emerging results of this research suggested that a national tax or charge may not be the most effective way to secure further improvements in water quality. The Government does not, therefore, intend to introduce a national tax or charge on water pollution discharges and improvements in water quality will continue to be sought through focussed use of the regulatory system.

The possibility of a tax on chemical fertilizers was discussed in "Economic instruments for Water Pollution", published by the Department of Environment, Transport and the Regions in November 1997. Some of the issues raised by a possible tax on fertilizers are similar to those being considered in the context of a possible pesticides tax. The Government will consider carefully the research on a possible pesticides tax - and views expressed on the issues raised in the research report - in deciding whether to undertake further work on a possible tax on fertilizers.

    (n)  We urge the Governments to introduce the graduated reduced vehicle excise duty on cars in the 1999 Budget, and also to report how it intends to appraise the impacts of the small incentives introduced so far, the findings of such evaluations and its intention regarding increases in the differentials in the future.

Following the consultation on the reform of Vehicle Excise Duty (VED), the VED rate for cars with engines up to 1100cc will be reduced from £155 to £100 on 1 June 1999, in order to encourage the use of smaller, cleaner vehicles.

From Autumn 2000, a graduated VED system will be introduced for new cars based primarily on emission rates of carbon dioxide. This will give a clear additional signal to vehicle purchasers and manufacturers about the environmental consequences of their choices, in order to encourage the take­up of more fuel-efficient vehicles.

The Government will keep under review the effect of these measures on the environment. The environmental impact will be among the factors taken into account when making decisions on future VED rates.

    (o)  We urge the Government to set out its intentions on future rates of duty on road fuel gases.

In 1997 the Government froze the rate of duty on road fuel gases and undertook to at least maintain the duty differential with diesel fuel for the lifetime of this Parliament. Since that time the Government has taken a number of measures in support of its environmental aims to promote the use of gas vehicles, which can offer reductions in particulates and nitrogen oxides emissions compared with conventional vehicles, as well as offering the potential for quieter vehicles.

The duty on road fuel gases was reduced to 15 pence per kilogramme in the 1999 Budget in further recognition of the environmental merits of gas as a road fuel - a reduction of 29 per cent.. The Government hopes that this reduction will encourage manufacturers to increase distribution and availability of this environmentally friendly fuel and that the lower price to the consumer will help offset the cost of vehicle conversion.

The duty on road fuel gas is now, on an energy basis, substantially below that on diesel, and the differential between road fuel gases and diesel is now greater than in any other EU country. The duty cut is one of a number of Government incentives designed to reward 'green' vehicle owners. For example, the maximum discount on Vehicle Excise Duty for low emission lorries and buses was doubled to £1,000. In addition, the Government maintained the 100 per cent. fuel duty rebate for buses running on natural gases and continues to fund the Energy Savings Trust which can give grants up to 75 per cent. towards the additional conversion or purchase price of gas vehicles.

The lack of a refuelling infrastructure is one of the barriers to substantial growth in the gas vehicle market, but both Shell UK and BP Oil recently announced significant investment and commitment in improving fuelling infrastructure.

    (p)  We urge the Government to release its consultation paper on Bus Fuel Duty Rebate and in the forthcoming Budget to make a commitment to introduce the resulting changes in the following Budget.

The increase in Fuel Duty Rebate announced by the Department of the Environment, Transport and the Regions on 9 March 1999 matched the changes in fuel duty in the Budget and will help to maintain the competitiveness of the bus industry. The consultation document on Fuel Duty Rebate, including discussion of targeting the rebate towards low emission vehicles and rural bus services, will be published shortly.

The importance of local bus services has been recognised in the new integrated transport daughter document "From Workhorse to Thoroughbred - A Better Role for Bus Travel" published on 23 March.

    (q)  We urge the Government to address the tax disincentive to adopting Green Transport Plans.

The Chancellor's recent Budget provided a package of measures to encourage the adoption of Green Transport Plans, notably by removing the tax charge on the following benefits which employers provide to their employees to enable them to travel to and from work without using their own cars:

  • large works buses
  • subsidies to public bus services
  • bicycles and cycling safety equipment
  • workplace parking for bicycles.

In addition a tax-free cycling allowance, incorporating a new relief for capital allowances, of 12p per mile is being introduced for employees who use their own bicycles on business travel. And, to help car sharing arrangements, payments which employers make for employees' journeys home in exceptional circumstances where their car sharing arrangements break down will no longer be taxed.

As well as encouraging Green Transport Plans the removal of the tax charges will also reduce tax record-keeping for employers.

    (r)  We urge the Government to address the perverse incentive to travel more miles, which exists under the company car taxation system.

The Government has announced that the taxation of company cars is to be fundamentally reformed to help protect the environment. From April 2002, it will remove entirely the incentive to drive extra business miles by abolishing the existing business mileage thresholds. Instead, there will be a charge on a percentage of the car's price graduated according to the level of the car's carbon dioxide emissions (in grammes per kilometre). We estimate that this reform could eventually reduce total annual carbon dioxide emissions from UK transport by between 1.5 and 3 per cent. a saving of between 0.5 and 1 million tonnes of carbon a year.

To pave the way for this reform, the existing discounts are being reduced by increasing the effective charges that are levied at the two mileage breakpoints. These changes, which take effect from 6 April 1999, will help reduce the incentive to drive extra business miles in advance of the major reform and so help, to ease urban congestion and pollution.

    (s)  In our view the consideration of out-of-town parking charges is another which illustrates the case for coordination of policy making and openness in the process, in the way which can be achieved through the services of a Green Tax Commission.

The provision of retail and leisure car parking for customers was considered when drawing up the Integrated Transport White Paper. Following a full and open consultation exercise, the Government concluded that it would not be sensible to attempt to require organisations to charge customers at the point of use. Charging schemes will be limited to pilot workplace parking and road user charging.

The preferred approach is to integrate transport with land use and plan for sustainable alternatives to car dependence. Some major retailers have already taken significant steps to reduce car dependency, such as supporting local bus services. Local Transport Plans offer opportunities for closer partnership between local authorities and major retailers and leisure operators in their areas. Regional Planning Guidance will promote major new developments within existing transport corridors or close to good public transport facilities, and ensure that car parking space is limited to the minimum necessary and full provision is made for public transport access.

The Government will consider the lessons from pilot charging schemes and ask the new, independent, Commission for Integrated Transport to assess the effectiveness of this approach before deciding whether other action might be justified.


 
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