GOVERNMENT MEMORANDUM TO THE ENVIRONMENTAL AUDIT
COMMITTEE: RESPONSE TO THE COMMITTEE'S FOURTH REPORT ON THE 1998
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
(a) The Pre-Budget
Report made no start in using information already available to
show how Government economic policies would deliver environmentally
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
- effective protection of the environment;
- prudent use of natural resources;
- maintenance of high and stable levels of growth
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
(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 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
(d) We recommend that
the Government consults on a scheme to promote investment in specified
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
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
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
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
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
(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
(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
(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
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
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
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
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
As well as encouraging Green Transport Plans the
removal of the tax charges will also reduce tax record-keeping
(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
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.