Select Committee on Environmental Audit Third Report

Addressing subsidies which have a detrimental impact on the environment

20. In their third report the Government Panel on Sustainable Development drew attention to the way subsidies, tax exemptions and government expenditure on infrastructure create incentives or directly create adverse impacts on the environment. They particularly drew attention to agricultural production related subsidies, the tax regime and financing of the energy and transport sectors, and quoted an estimate for environmentally damaging subsidies of £20 billion.[24] In its response to this report in December 1997 the Government accepted that it should draw up aims and principles for the future use of subsidies and noted that subsidies were under review as part of the Comprehensive Spending Review.[25] In addition to this the Chancellor said, in June 1998, shortly before the completion of the Review, that "before allocations are made from the Comprehensive Spending Review, departments will have to demonstrate how they propose to root out unjustified subsidies".[26] The Treasury's explanation of this in evidence was that a subsidy with adverse environmental impact could be justified but would be considered unjustified if its environmental cost was greater than its economic and/or social benefit.[27] We note that in the light of the debate over valuing environmental costs it must be difficult in actual cases to weigh this up precisely. We therefore consider it is particularly important that considerations of the justification for subsidies should be made explicit and open to public scrutiny.

21. We found little evidence in the report of the Comprehensive Spending Review, and in the subsequent Public Service Agreements, of a general effort to address unjustified subsidies, although there was reference to efforts to reform some subsidies: to press for reform of the Common Agricultural Policy and to reform the system of industrial subsidies to businesses to ensure that the tax-payer gets value for money.[28] The Chief Secretary assured us that the Review had looked carefully at the three areas identified by the Panel and he accepted that in some of these areas there are unfair subsidies. However, he did not then list them or show how they were to be rooted out, choosing rather to highlight examples of particular Government commitments — its objective to reform the Common Agricultural Policy; on energy, its consideration of the Marshall Report on economic instruments and the business use of energy, funding for energy efficiency schemes and announcement of the non­fossil fuel order; and on transport, the scaling back of roads expenditure in the Trunk Roads Review.[29]

22. We note that the Chief Secretary's list addresses some of the subsidies which make up the estimate of £20 billion quoted by the Panel and that most of the others are on the Government's agenda through other initiatives.[30] For example, measures are being considered or implemented to address implicit transport subsidies in the Integrated Transport White Paper, company cars in the tax proposals in the Pre-Budget Report 1998, and free medical treatment and the cost of dealing with road traffic accidents is being partially addressed through the Road Traffic (NHS Charges) Bill. The implicit subsidy from not charging for water according to its use has been the subject of consultation by the Department of the Environment, Transport and the Regions and is the subject of the Water Industry Bill.[31]

23. We conclude that although the Government did not formally use the Comprehensive Spending Review to tackle subsidies which have an adverse environmental impact it is none-the-less considering action to address many of them. We welcome this and look forward to being able to see real progress on removing these distortions.

24   British Government Panel on Sustainable Development Third Report, January 1997 Back

25   Government Response to the Third Annual Report of the Government's Panel on Sustainable Development, December 1997 Back

26   HC Deb 11 June 1998 col 1198 Back

27   Ev p1 Back

28   Op. Cit. p24 Back

29   Q28 Back

30   Environmentally Damaging Subsidies in the United Kingdom, Maddison et al, European Environment, Vol 7, pp 110 - 117 (1997) Back

31   Water charging in England and Wales - A new approach March 1998 and Government Decisions following consultation November 1998 Back

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Prepared 16 February 1999