Select Committee on Environmental Audit Sixth Report

Consistency in implementing environmental tax measures

23. The Committee remains concerned at inconsistencies in the Government's approach to the development of environmental tax measures, and the Government response to our work on the Pre-Budget Report has done little to allay this. It is insufficient for the Government to argue that "in each case, it has set out its environmental objectives, commissioned external research, and developed the proposals in an open and consultative way".[22] Our concerns relate to inconsistencies in the approach adopted within each of these three areas.

24. On aggregates, for example, the Government has accepted that the tax is a very blunt instrument for tackling the local environmental impacts which quarrying gives rise to and which will vary significantly in level and emphasis from quarry to quarry.[23] Furthermore it has gone ahead with a straightforward tax despite considerable evidence that demand is very inelastic.[24] By contrast, it has failed to implement a tax on pesticides even though demand is more elastic and the theoretical case is much stronger because of the diffuse nature of the pollution and the difficulties of tackling this through traditional regulation.[25]

25. We are particularly concerned at inconsistencies in the treatment of costs. These fall into three categories:

(a)  direct financial costs of an activity/product (born by the producer);
(b)  indirect financial costs (costs born by other sectors of society); and
(c)  costs which are difficult to financially quantify, such as the impact of an activity on biodiversity.

26. In the case of pesticides, for example, the government has failed to identify either (b) or (c) In its response to our Pre-Budget Report, it argues that it is very difficult to identify (c) in this particular case, but makes no mention of its failure to identify (b) - in particular the substantial capital and operating costs falling to water companies (and ultimately paid for by the consumer) to remove pesticides.[26] By contrast, in the case of aggregates, the environmental costs identified by the Government were largely (c).[27] We recommend that the Government must be consistent when comparing environmental costs for proposed green taxes. It should establish direct and indirect financial costs in all cases, and should clarify its approach to identifying and estimating non-financial impacts.

27. Events have also made it abundantly clear that there has been a marked inconsistency in the approach adopted by the Government towards industry. In the case of pesticides, we have already referred to the precipitate action taken by the Government in dropping immediate consideration of a pesticides tax without even making public the initial proposals put forward by the Crop Protection Association (CPA) (formerly the British Agrochemcials Association (BAA)).[28] We also noted that neither DETR, Treasury nor MAFF issued a press notice when the revised proposals were released for consultation by the CPA in April. Indeed we found it unhelpful that, while all of these Departments' web sites have lists of current consultations, none contained reference to the CPA's proposals.[29]

28. These actions, particularly in view of the singular lack of targets and performance indicators in the CPA's proposals, supports the view that the Government is adopting a far more conciliatory approach to the agricultural lobby and the agrochemical industry than, for example, to the quarrying industry. The evidence which the Quarry Products Association (QPA) submitted to us following Budget 2000 points to major deficiencies in communication between the Government and the QPA. The QPA have argued that there was a lack of constructive dialogue in exploring aspects of their proposals—particularly over the issue of addressing the significant levels of procurement by Government of aggregates.[30] This argument was strongly contested by Mr Timms, both in oral and written evidence, describing the QPA's assertions as "misleading".[31] The Treasury's view of the position on procurement is set out in a supplementary memorandum and attached letter from the Minister to the QPA.[32]

29. We therefore remain convinced that there is a strong case for a Green Tax Commission made up of all core stakeholders, with relevant industry representation, to provide more consistent analyses of the scope for environmental taxes; and perhaps even to conduct negotiations and consultations on these issues from a more independent standpoint with a view to building consensus over the way forward. The Government has been keeping this proposal under review. Recently the UK Round Table on Sustainable Development in its report on economic instruments supported our proposition, and went on to say that, were Government to reject that recommendation, this function should be included in the remit of the new Sustainable Development Commission.[33] We reiterate our support for a Green Tax Commission as our preferred option especially in view of the support for this idea expressed by the UK Round Table. In the interim we recommend that the remit of the new Sustainable Development Commission should include a responsibility to advise HM Treasury on sustainable development economic instruments.

Green procurement

30. We believe that the Government could make greater use of procurement to further sustainable development and we have also discussed this in our Report on the work of the Green Ministers.[34] The last decade has seen an enormous growth in the extent to which departments are contracting out various aspects of their operations. This has been greatly reinforced by growth of Public Private Partnerships (PPPs) and Private Finance Initiatives (PFIs) as vehicles by which departments may embark on major capital projects and overcome the restraints which traditional annual cash limits have placed upon them. These developments have brought into sharp relief the difficulty of ensuring that procurement takes full account of environmental factors. Contractual arrangements under PPP and PFI are complex and this may militate against departments going the extra mile to integrate environmental considerations into arrangements. In this light we were disappointed that the Government's response failed to address our recommendation that Partnerships UK (the new body responsible for assisting the development of PPP and PFI projects) should have sustainable development included in its aims and objectives.[35] We expect the Government to remedy this situation in line with our recommendation.

31. Overall we find existing guidance on green procurement to be confused. DETR guidance on sustainable construction explicitly enjoins departments "to endorse during 2000 a programme for more sustainable construction procurement."[36] Similarly, the Green Ministers Report states that "as a major purchaser, Government has the opportunity to influence suppliers to provide sustainable goods and services ...".[37] However, the joint DETR/Treasury guidance note on procurement contains, in a section discussing EC contract conditions, the statement that "the UK's domestic policy of not using procurement to achieve other policy ends limits the extent to which departments may have recourse to contract compliance".[38] In addition, draft procurement guidelines issued by the Treasury in March, and quoted by the QPA, contain the following 'Key point for Senior Management': "Procurement must not be used as a vehicle for delivering policies such as environmental sustainability."[39] Such contradictions between the various sources of guidance available to departments are not helpful. The Government should work much more systematically, within the framework of EC legislation, to promote "green" procurement.

32. We were also concerned about the use of "whole life costs" as a basis for incorporating environmental aspects into procurement. The Government response to our Fourth Report points to the joint DETR/Treasury note as providing guidance on how purchasers can specify requirements in green terms where appropriate and award contracts on the basis of whole life costs rather than lowest price.[40] This fails to take account of the conclusions of the Government's own analysis that public procurement is risk averse and tends towards lowest initial cost in procurement decisions.[41] Furthermore the guidance suggests that, in assessing whole life costs, the criteria which departments can take into account are restricted to the impact on the purchaser's own operations.[42] There appears to be no scope for including criteria relating to providers' operations, i.e. environmental costs falling on the wider economy. Indeed, the Financial Secretary made it clear that one of the primary reasons for rejecting the proposals put forward by the Quarry Products Association was that there was no such scope for differentiating between suppliers on the basis of their "green credentials".[43] But it seems bizarre that a department may not distinguish between the same quality of aggregate produced by an environmentally well-managed quarry as against a quarry which operates in a environmentally reckless way. We therefore find it curious that "whole life costs" cannot reflect differences in the environmental costs created by different suppliers.

33. With regard to the establishment of the Office for Government Commerce (OGC) the Government appears to have accepted our encouragement to incorporate sustainable development into the Office's objectives.[44] We remain somewhat cautious and mindful that this must not become another "bolt-on" extra to which lip-service only is paid. Our original conclusions made it clear that we think sustainable development and greening procurement should be a central aim of this body. We were surprised that in its response the Treasury chose to put on one side our reference to the Green Ministers' view of sustainable procurement, reference to Partnerships UK and the extreme seriousness with which we viewed the original stance of the department.[45] This is not the only occasion on which Government departments have failed to respond to conclusions or recommendations set out in bold type and we hope that such omissions will not occur in future.

34. The Government's green procurement policy and its performance in contributing to the promotion of sustainable goods, services and markets, are manifestly deserving of a closer look. We intend to examine the matter in more detail, building on the conclusions of the Green Ministers' review, should the time remaining in this Parliament permit.[46]

Progress on specific measures

35. Our Pre-Budget Report devoted considerable attention to three main areas where environmental taxes were under consideration—energy (the Climate Change Levy), aggregates, and pesticides. We followed up progress on these measures in our most recent oral evidence session with the Financial Secretary and afterwards requested a supplementary memorandum.[47] The following paragraphs set out our main concerns and comments in the light of ongoing developments.

(i) Climate Change Levy

36. The taxation of energy is an environmental imperative and we have expressed concern at the design of the Climate Change Levy as a downstream tax on energy consumption. We note the recommendation of the Royal Commission on Environmental Pollution for an upstream carbon tax (with the first call on revenue being the tackling of fuel poverty).[48] However, given the fundamental nature of the Government's design of the Levy, we believe that its effective implementation is the best available option. In this light we are concerned at the extent of slippage in the Government's timetable for completing sectoral agreements with industry. In January the Financial Secretary told the Committee that, following the signing of memoranda of understandings (MoUs) in December, good progress was being made and that he certainly hoped the final legal agreements with the ten first wave sectors would be signed by the end of March.[49] In early April, he told the Committee that the MoUs with first wave sectors would be translated "shortly" into full negotiated agreements;[50] while the response to the Committee's Pre-Budget Report 1999 stated that the Government expected even the second wave to sign full agreements over the summer.[51] However, in June, Lord Whitty, the DETR Minister responsible for climate change (policy) told the Committee that it would take "a few months" even to get some of the first wave agreements signed.[52] We are concerned at the slow progress of negotiations over the Climate Change Levy whose target date for introduction is April 2001. This is causing considerable uncertainty.

37. We also have noted the question of whether EC State Aid rules apply to the rebates on offer to those sectors who might be able to accede to an agreement on energy saving. We note that the Climate Change Levy scheme (CCL) was submitted to the European Commission in February 2000 some 10 months after announcement.[53] Supplementary evidence from the Treasury is sanguine about the prospects for the Commission's agreement to the proposals, not least because the CCL would assist the EU in meeting its overall Kyoto emissions target.[54] We look to Government to clarify the position over this major plank of its response to Climate Change as soon as possible.

38. The Committee welcomes the £100 million first year capital allowances for firms making energy saving investments and the commitment to raise this to £140 million in 2001-02.[55] However, as the Government's consultation document on this measure points out explicitly that enhanced capital allowances (ECAs) represent only a delay in receipts, and that the net tax revenues remain the same as companies would pay more tax than they otherwise would in subsequent years.[56] It is clear that, despite the terms of the Chancellor's announcement, this does not amount to an investment of £100 million by the Government each year in energy efficiency. Clearly business has welcomed the move but in fact the ongoing actual expenditure by Government may amount to little more than lost interest on deferred payments. The Financial Secretary did not know what the value of the £100 million first year allowance would be in Resource Accounting terms which might have clarified the situation and the Treasury subsequently emphasised the position of tax receipts as outside Resource Accounting rules.[57]

39. With regard to the £50 million fund for sustainable energy, the Electricity Association entirely endorsed our original recommendation that much more money needed to be recycled for this purpose.[58] We are disappointed that not only will the sum available be reduced by the pre-emptive allocation of a proportion to horticulture, but that the Government is not proposing to direct the balance wholly towards small and medium-sized enterprises (SMEs)—despite the fact that, as the Electricity Association points out, Lord Marshall specifically proposed the Levy as a means of addressing the difficulty of encouraging SME's to invest in energy efficiency.[59] In this light we were frustrated that the Government did not see fit to respond to the recommendation in our Fourth Report which pointed to the value of increasing the support available under the Climate Change Levy for energy efficiency investments and directing it towards those sectors and firms not covered by the relevant strictures of Integrated Pollution

 Prevention and Control (IPPC) nor eligible for participation in a negotiated agreement (and the associated 80% rebate).[60]

(ii) Aggregates Levy

40. A central aspect of both the original QPA proposals, and the Government's implementation of a tax, is the creation of a Sustainability Fund to finance measures to address the important local environmental impacts of individual quarries.[61] The Financial Secretary told us in oral evidence that this would be funded by the revenue from the tax which was in excess of the cost of cutting employers' National Insurance contributions (NIC) by 0.1%.[62] The latest estimate of the cost of this cut is £360 million in 2002-03, the first full year of the tax.[63] Table A13 of the Budget Report states that the aggregates tax will raise £385 million in its first year,[64] thus providing for, at best, a fund of £25 million for local environmental improvements. However, the Quarry Products Association have raised doubts about whether revenue from the tax will in fact exceed the cost of reducing NI contributions (then thought to be only £350 million) especially given different views on the level of taxable aggregates production in the near term.[65]

41. We were reassured by the Treasury's supplementary evidence on this point which stated that a Sustainability Fund "to deliver environmental improvements to the local communities affected by aggregates extraction" was "a firm announcement".[66] We take this to be a commitment to resource the Fund adequately from public expenditure even if revenues from the Aggregates Levy do not in fact significantly exceed the cost of the cut in NICs.

(iii) A pesticides tax and voluntary proposals

42. In our Fourth Report, we made it clear that we considered the Government acted precipitately in announcing within weeks of receiving the initial BAA proposals in January that it would not go ahead with a pesticide tax in the 2000 Budget.[67] We refer above to the unsatisfactory nature of the consultation process and we note that the proposals themselves focus largely on increased training for pesticide users and contain few detailed targets. We will return to this issue in more detail in considering the 2000 Pre-Budget Report in the autumn.

(iv) VAT on installation of energy saving materials

43. We were delighted, but surprised, at the Government's volte face with regard to VAT on the installation of energy saving materials. We have on several previous occasions pressed the Government on the scope for a reduction in the rate of VAT in this area, only to be told repeatedly that there was no possibility of doing so within the present framework of EC legislation. In his evidence to us, the Financial Secretary explained that the U-turn had come about for two reasons. First, new research by the London School of Hygiene and Tropical Medicine, funded by Joseph Rowntree Foundation, establishes causal links between UK housing conditions and the high incidence of cardiovascular deaths in winter (compared to continental Europe and Scandinavia). Secondly, at the end of 1999 the European Commission conceded "they could not dictate to Member States what their social policies should be" ('social policy' being the key criteria for the application of reduced VAT to housing renovation set out in the 6th VAT Directive).[68]

44. While we welcome the new policy, we remain sceptical about the reasons Mr Timms put forward for not adopting it sooner. It has been known for a long time that the UK has an excessive number of winter deaths, and that the quality of housing (particularly energy efficiency and heat insulation) in the UK is relatively poor. We find it unconvincing that the Government should claim that the link between these two factors (and between both these factors and poverty) has only now been established.[69] We consider that delayed action may simply reflect a lack of political will in the face of 'Delphic' advice from the European Commission on the issue rather than any concrete change in EU policy.[70]

45. Finally, we note that the impact of the new policy may be reduced by the limitation of eligibility to the installation of those materials 'whose primary purpose is energy efficiency'—a definition which for example excludes low-emission glass and energy-efficient boilers.[71] We urge the Treasury, in consultation with the DETR, to extend the reduced rate of VAT to cover products with significant energy-saving features, such as those mentioned above.

Postcript: the scale of the challenge

46. The Government remains committed to a substantial raft of both specific, and more general, objectives in the field of sustainable development and environmental protection—multilateral and domestic targets for reductions in greenhouse gas emissions, better waste management and imperatives to address pollution and congestion from ever-increasing levels of road traffic are key examples. The scale of the challenge is formidable as reports from the Royal Commission on Environmental Pollution, the Panel and Round Table on Sustainable Development and the Government's own Sustainable Development Strategy make clear. It is unlikely that much can be achieved without enlisting the pervasive forces of market signals which do much to influence conscious and unconscious behaviour. Green taxes should be used, wherever possible on a revenue neutral basis and in concert with other measures, to help producers and consumers to become more environmentally responsible. It is a price worth paying—the consequences of not taking action in good time are likely, at best, to be much higher costs of redress in the long run, and, at worst, have the potential to be devastating.[72]

22   Government response, appended to this report, paragraphs 55-57. Back

23   EAC Fourth Report, HC 76, QQ 331 & 341. Back

24   Ibid.. Q100. Back

25   Evidence from Ofwat, Water UK and others in our current inquiry on water prices for 2000-2001 suggests that fiscal measures could play an important part in combatting the diffuse pollution arising from the widespread use of pesticides (see HC 597, 1999-2000). Cf also EAC Fourth Report, paragraph 20. Back

26   Government response, appended to this report, paragraphs 12-16. Back

27   The Environmental Costs and Benefits of the Supply of Aggregates-Phase 2, DETR July 1999.  Back

28   Environmental Audit Committee, Fourth Report, 1999-2000, HC 76, paragraphs 11,12. Back

29   The proposals can be found at and reference to the DETR consultation at Back

30   Ev p37ff. Cf Ev p19f Back

31   Ev p18 paragraph 7 Back

32   Ev p18-20 Back

33   UK Round Table on Sustainable Development, "Not too difficult!", April 2000, recommendation 9. Back

34   Fifth Report from the Committee, 1999-2000, HC 341, paragraphs 50ff. Back

35   Paragraphs 62-63 of the Government response, appended to this report, do not refer to Partnerships UK. Back

36   Building a Better Quality of Life: A Strategy for more Sustainable Construction, DETR, April 2000, paragraph 2.14. Back

37   Greening Government: First Annual Report of the Green Ministers Committee 1998/99, July 1999, paragraph 5.31. Back

38   Environmental Issues in Purchasing, Note by the Treasury and DETR, 1999, paragraph 6(d). Back

39   Ev p38 Back

40   Government response, appended to this report, paragraph 62. Back

41   Review of Civil Procurement in Central Government, Peter Gershon, April 1999, paragraph F5. Back

42   Environmental Issues in Purchasing, Note by the Treasury and DETR, 1999, paragraph 10. Back

43   The same point is made in the paragraph 5.32 of the First Annual Report of the Green Ministers Committee, July 1999. Back

44   Government response, appended to this report, paragraph 63. Back

45   The Government response (recommendation (w) above paragraph 62) does not reprint the full text of our original recommendation as set out in our Fourth Report, 1999-2000, paragraph 115.  Back

46   First Annual Report from the Green Ministers Committee 1998/99, June 1999. Back

47   Ev pp18-19 Back

48   Energy - the Changing Climate, RCEP, June 2000,Cm 4749, page 4 paragraph 24. The EAC will comment further on the RCEP's analyses and proposals in a forthcoming report which follows up our 7th Report of 1998-99, Energy Efficiency, HC 159. Back

49   Environmental Audit Committee, Fourth Report, 1999-2000, HC 76, QQ384-385. Back

50   Q95 Back

51   Government response, appended to this report, paragraph 51. Back

52   Evidence to the Committee from The Lord Whitty, Parliamentary Under-Secretary of State and Minister for Energy Efficiency, DETR, 13 June 2000, Q74 (to be published as HC 571). The evidence is available on the Committee's web site at Back

53   Ibid. question 76 Back

54   Ev p18 paragraphs 1-2 Back

55   Budget 2000: Prudent for a Purpose, HM Treasury, March 2000, paragraph 6.23. Back

56   DETR Energy Efficiency Measures under the Climate Change Levy Package, November 1999, paragraph 33. Back

57   Q94. See also Ev p18 paragraph 3. Back

58   Ev p33 Back

59   Ev p33. See also Economic Instruments and the Business Use of Energy. A report by Lord Marshall, November 1998. Back

60   The Government response, appended to this report, does not address the recommendation on this point made in our Fourth Report, 1999-2000, at paragraph 73. While this recommendation did not feature in our summary of key recommendations (paragraph 1 of HC 76), it was clearly made in the Report and highlighted in a letter from the Clerk to HM Treasury which accompanied the Report. Back

61   A New Deal from the Aggregates Industry, Quarry Products Association, July 1999. The Government has adopted the same name for its proposed fund (Budget 2000: Prudent for a Purpose, HM Treasury April 2000, paragraph 6.94). Back

62   Q60 Back

63   Ev p18 paragraph 8 Back

64   Budget 2000: Prudent for a Purpose, HM Treasury, March 2000, page 150. Back

65   Ev p42 Back

66   Ev p18 paragraph 12 Back

67   Op. cit., paragraph 12  Back

68   QQ 16, 21, and Ev p18ff Back

69   Research on the links between cold homes and ill-health dates back to at least the 1970s when Malcolm Wicks, now a Minister at the DfEE, produced "Old and Cold" (1978). The publication Fuel Poverty, energy efficiency and health by Melanie Henwood (1997) includes a list of references and literature review. More recently a briefing prepared for the DTI offered an overview of the problem of fuel poverty which included a section on ill-health. This briefing forms the annex to Chapter 7 of the DTI 1998 Energy Report Transforming MarketsBack

70   See Q246 from evidence to the Committee from DETR officials on Energy Efficiency, 1998-99, HC159-II. Back

71   Evidence to the Committee from The Lord Whitty, Parliamentary Under-Secretary of State and Minister for Energy Efficiency, DETR, 13 June 2000, Q98 (to be published as HC 571). The evidence is available on the EAC web site: Back

72   On climate change for example: the RCEP report addresses global impacts (Energy - the changing climate, paragraphs 2.27-2.35) and refers to, inter alia, increased coastal flooding affecting up to 94 million people per year by 2080; in the UK the DETR estimates that a resulting £1.2 billion may be needed to strengthen coastal and river flood defences alone in England and Wales over the next 50 years. Overall, using figures for GDP from the IPCC, and estimates from the UNEP of possible costs arising from the impacts of climate change, the global cost of climate change by 2020 may be in the order of US $1,000 billion a year (2% of GDP). The UNEP suggest that developing countries are twice as vulnerable to these negative impacts as developed countries and that small island states are about three times as vulnerable. Back

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