Select Committee on Environmental Audit Sixth Report


The Government's central economic objectives are the promotion of high and sustainable levels of growth and high levels of employment. By that we mean that growth must be both stable and environmentally sustainable. Quality of growth matters; not just quantity.

Delivering sustainable growth is a task that falls across government. It will be a core feature of economic policy under this administration. The Treasury is committed to that goal.

How and what governments tax sends clear signals about the economic activities they believe should be encouraged or discouraged, and the values they wish to entrench in society. Just as work should be encouraged through the tax system, environmental pollution should be discouraged.

To that end, the Government will explore the scope for using the tax system to deliver environmental objectives -as one instrument, in combination with others like regulation and voluntary action. Over time, the Government will aim to reform the tax system to increase incentives to reduce environmental damage. That will shift the burden of tax from "goods" to "bads"; encourage innovation in meeting higher environmental standards; and deliver a mor dynamic economy and a cleaner environment, to the benefit of everyone.

But environmental taxation must meet the general tests of good taxation.
Economic instruments such as taxes, charges and trading can offer the scope for delivering environmental gains in a cost effective way. By making use of the price mechanism, economic instruments allow those involved in environmentally damaging activities to respond according to their own circumstances. Those facing the lowest costs of pollution abatement are given an incentive to make larger pollution reductions. Attaching a price to environmental 'bads' creates a permanent incentive for innovation and investment in less polluting and resource intensive methods of production, and encourages the consumption of 'cleaner' products.

The Government will consider using the tax system to deliver environmental benefits on a case by case basis, taking account of its wider economic and social objectives. Taxation will often be most effective in tackling environmental problems when introduced as part of a package of policies. Trading, local charging, public spending, regulation and education all have a role to play.

The Government aims to target public spending where it will bring the greatest benefits and raise revenues in ways which cause least distortion to the economy. The revenues from environmental taxes may allow reductions in other more distortionary taxes or increased spending on public services. Generally, how revenue is raised will not determine how it is spent. But the merits of using the revenues from environmental taxes to fund complementary spending measures, for example to enhance the environmental impact of the tax, will be considered on a case by case basis.

Environmental taxation is not simply an excuse for raising revenue. How and what a government taxes sends a clear signal about the economic activities which it wants to encourage or discourage, and the values it wishes to entrench in society. Over time, the Government aims to shift the burden of tax from 'goods' such as labour and capital to 'bads' such as pollution. But, in line with the Government's Statement of Intent on Environmental Taxation, published in July 1997, any environmental taxes should meet the tests of good taxation.

Criteria for good taxation
Criteria for good taxation
[Not explicitly stated under good criteria for taxation, but implicit throughout the preceding paragraphs of the statement.] Polluters should face the true costs which their actions impose on society. When individuals and firms do not bear the full costs to society of their activities, despoiling the environment can seem like an easy option. But pollution imposes real costs on the rest of society - and not just on the present generation. Some of the biggest problems faced today - such as contaminated land - have been caused by the short-termism of the past. This must change. Polluters should not be able to treat the environment as a free resource, and our children should not be expected to foot the bill for our decisions
It must be well designed, to meet objectives without undesirable side-effects.

It must keep deadweight compliance costs to a minimum
Economic instruments must deliver real environmental gains cost effectively. Environmental taxes will be most effective where they target the polluting activity directly and avoid perverse side effects. This is why the Government intends to exempt 'new' renewables from the climate change levy. Taxes must not cause excessive administration or compliance costs. The Government will continue to provide a clear, long-term signal of its intentions so that firms with long investment cycles have the time they need to adapt. In some cases, national taxes may not be the best way of dealing with localised environmental damage. This is why the Government has ruled out a national tax charge on water pollution.
Distributional impact must be acceptable The social consequences of environmental action must be acceptable. Environmental improvements should not be at the expense of hurting the most vulnerable in society. The Government reduced the rate of VAT on domestic fuel and power to the lowest rate allowable under EU regulations as part of its determination to combat fuel poverty. The Government recognises the particular needs of rural communities. That is why additional resources have been provided for public transport provision in rural areas.
Care must be had to implications for international competitiveness Environmental policies must not threaten the competitiveness of UK business. Well-designed policies need not damage growth and employment in the economy. Taxing environmental 'bads' may allow lower taxes on 'goods' such as labour and capital. The introduction of the climate change levy will entail no increase in the burden of the tax on business since it will be fully offset by a cut in employers' National Insurance Contributions and increased support for energy efficiency schemes. This increases the cost to firms of using energy but reduces the costs to firms of hiring workers, and should generate an increase in overall employment.
    Environmental policies must be based on sound evidence. The body of scientific evidence on global warming has forced governments worldwide to act, but in other cases, damage is more localised. In most of these cases, there is uncertainty about the nature and scale of the effects involved. Developing practical and effective policies requires detailed research, careful planning and extensive consultation. But uncertainty cannot necessarily be used to justify inaction. Today's greenhouse gases may be tomorrow's climatic disaster. Sustainable development means taking action on the basis of the best available evidence and taking full account of the risks of environmental damage occurring.

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