Select Committee on Environmental Audit Fourth Report


THE PRE-BUDGET REPORT 1999: PESTICIDES, AGGREGATES AND THE CLIMATE CHANGE LEVY

PROPOSED PESTICIDES TAX

9. The following table sets out the history of announcements and proposals on taxation relating to water pollution and abstraction.

March 1997DETR commissioned report "The Private Costs and Benefits of Pesticide Minimisation" (Risk & Policy Analysts Limited & Entec) which estimated cost-effective savings from reduced pesticides use by farmers to be about £274m.
Budget 1997Consultation paper to be issued, in time to inform the next Budget, on the role of economic instruments in improving water quality.
Pre-Budget 1997"Economic Instruments for Water Pollution", issued covering pollution charging, pesticides tax and nutrients tax. This included the executive summary of a report by Ecotec, "Economic Instruments for Pesticide Minimisation". On water pollution, research was commissioned by the DETR to test the feasibility of a pollution charging system and develop it.
January 1998Critique of the DETR's March 1997 study carried out by Morley Agricultural Consultants for the British Agrochemicals Association. This concluded that the original study had overstated the possible cost-effective savings—a more realistic figure was about £100 million.
Budget 1998The Government is considering responses to consultation. Research on water pollution charging is continuing.
Pre-Budget 1998The Government is considering the responses to consultation. Research work is continuing. On pesticides, the research is into whether a tax or charge would be effective in rebating pollution and is looking at various design options.
March 1999DETR commissioned report "Design of a Tax or Charge Scheme for Pesticides", Ecotec 1999. This recommended a possible structure for a pesticides tax and analysed the likely impact on farmers.
Budget 1999Further consultation announced on pesticide taxation on the basis of the proposals contained in the Ecotec 1999 report. On water pollution, the Budget announced that following the emerging results from its research the Government did not intend to introduce a national tax or charge, with improvements instead sought through regulation. On a tax on the use of chemical fertilisers, the Budget was silent. A Government response to a previous EAC report announced that it would consider carefully developments on pesticides with a view to deciding whether to undertake further work on a possible tax on fertilisers because of the similar issues involved.


10. The 1999 Pre-Budget Report announced that on pesticides the Government believed that a tax or charge could be a useful tool, in conjunction with other measures, in addressing the environmental impacts of pesticides; but that it intended to explore with the agro-chemical industry whether these objectives could be better achieved through a partnership approach between Government and industry.[14]

11. On the 1st February 2000, the Government announced that, on the basis of the proposals submitted by the agro-chemical industry in January, it would not go ahead with a pesticide tax in the forthcoming Budget. This announcement occurred exactly two weeks after the Committee had questioned Mr Timms, Financial Secretary HM Treasury, about pesticide taxation and the approach the Government was adopting. He had acknowledged that he had received these proposals but stated that it was too early to talk about details: "As I have said, I have not studied the proposals that have been submitted, still less formed a view as to whether that is the right road to go down." We also noted his comment that he would look at these proposals carefully, and his acknowledgement "that a range of interests would need to be reassured. That is something that we would want to take seriously."[15] However, Mr Timms was not able to say whether a partnership approach itself would involve any representation from environmental organisations, and he appeared to suggest that the Government would be dependent in this respect on what the agro-chemical industry's proposals were.

12. In the light of these comments, we were astonished and disappointed that the Government decided to drop a pesticides tax so quickly without even making publicly available for discussion the actual proposals submitted by the agro-chemicals industry and without awaiting the conclusions of this Committee's inquiry. We regard the Government's announcement on this matter to be precipitate and discourteous to this Committee and therefore to the House as a whole. In a subsequent exchange of letters Mr Timms was able to clarify that the Government has not ruled out introducing a pesticides tax in the future.[16] We were glad of this assurance because, in ignorance of the thrust or detail of the industry's proposals, we remain convinced that there are strong grounds for introducing a pesticides tax, as we set out below.

Trends in use

13. The Committee received conflicting evidence on trends in pesticide use and notes the difficulty of establishing a clear picture. The NFU and BAA pointed to evidence that over the ten years from 1986 to 1996 there had been a 19 per cent reduction in the weight of active ingredients applied, once sulphuric acid—used for defoliation of potato crops—was taken out of the equation.[17] By contrast, the RSPB and the Pesticides Trust pointed to increases in the number of applications and the area of agricultural land subject to pesticide applications.[18] The Environment Agency stated that they had expected pesticide usage to have fallen in the last five years but that this had not occurred;[19] while the RSPB suggested that pesticide usage was likely to increase.[20] There appears little doubt that pesticide application is more widespread. We noted, for example, that the Ministry of Agriculture's Pesticide Usage Report showed that almost 2 million hectares of cereals were sprayed with synthetic pyrethroids in autumn 1996 compared with less than 1/4 million hectares in the late 1980s— largely due to farmers' desire to optimise yields of winter sown crops.[21]

Environmental impact

14. The Committee noted that the weight of pesticides applied may not give a good indication of the likely environmental impact of pesticides. Other factors such as the proportion of active ingredients, and their toxicity, biodegradability, persistence in the soil and application patterns, may all be significant.[22] The reduction in the absolute weight of pesticides applied has resulted partly from a continued move to newer, more active chemicals applied more frequently and throughout the year despite the lower overall dosage. Newer pesticides are more specific and may have more adverse environmental impacts weight for weight than older chemicals.[23] In this respect, we were surprised to hear evidence of a lack of information on sales of active ingredients within branded pesticide formulations and we would agree with the Pesticides Trust that there should be mandatory reporting of the quantities of active ingredients sold by the industry.[24] The absence of such data means that it is very difficult to assess the environmental impact of the use of different pesticides which may contain varying quantities of active ingredients. The design of an effective banding system for any pesticides tax may also be hampered by this lack of information.

15. But the fundamental issue which our inquiry revealed was that monitoring inputs gave no certain indication of outputs in terms of the environmental impacts of pesticide use. Evidence presented by witnesses suggested that because of the widespread and indirect effects involved it was exceedingly difficult to demonstrate specific causal relationships. Even where pesticides were thought to be at least partly responsible for environmental damage and decline, it could take many years of research to demonstrate a connection—although this had been done in a few cases such as the grey partridge and the corn bunting. Populations of farmland birds—a current proxy measure for possible effects on biodiversity—have shown a catastrophic decline, and various organisations suggested that pesticides were a significant factor in this.[25] The NFU and BAA were unable to point to any biodiversity indicators which were moving in the right direction.[26] We are therefore concerned at the extent of the possible environmental damage which might have already occurred and the speed with which this may be continuing.[27]

16. The present regulatory regime only examines the direct impact of pesticides and does not involve assessing the overall environmental consequences of their use, including indirect effects.[28] The proposed indicators included in the Ministry for Agriculture, Fisheries and Food's (MAFF) consultation document on sustainable agriculture focus on levels of residues in rivers and groundwater, quantities of pesticides used, and areas sprayed.[29] We welcome the fact that the Environment Agency is reviewing this area in order to make their monitoring programme more effective.[30] However, both the NFU and the RSPB agreed that in order to assess the environmental impact of pesticides it is necessary to measure not only inputs but outputs - the actual impact on plants and animals. They agreed that there needs to be more work to develop a set of biodiversity indicators, and in monitoring the impact of pesticides on ground waters.[31] But, in view of the difficulties involved, the development and implementation of a more comprehensive set of biodiversity indicators may take a considerable time and prove very expensive. Even when they are in place, it may be many years before reliable indications of trends can be derived from the monitoring programme.[32]

17. We believe, therefore, that pesticide pollution represents a particularly good instance of where the precautionary principle should apply. Mr Timms, in line with previous statements of Government policy, asserted the existence of broad agreement about the likely environmental impact of pesticides and the desirability of reductions.[33] The RSPB pointed to the consensus among other European countries that the likely extent of environmental damage was sufficiently great to take action even in the absence of causal proof; while the Pesticides Trust highlighted the fact that the objective of pesticide reduction had been explicitly adopted by a wide range of organisations including the EC and the OECD.[34] Even the NFU accepted that pesticide usage might adversely affect the environment though they emphasised that modern intensive farming systems were also partly to blame.[35]

Environmental costs

18. The Government has stated its full commitment to the "polluter pays" principle. This amounts to making the polluting industry bear the full costs of its activities which other sectors of the economy and the public may be bearing— in the jargon of economists "internalising the cost externalities" (including non-financial costs such as noise and environmental damage). Previous government studies on pesticides have had a variety of objectives—including researching the overall scope for a tax,[36] the extent of cost-effective savings farmers could make by using less pesticides,[37] and the feasibility and potential structure of a tax on pesticides.[38] But not one of them included any estimate in financial terms of the total cost externalities involved, though the latest Ecotec report does give some consideration to work done internationally in this area.[39] We were very surprised that the Government has made no attempt to carry out such a study. This contrasts markedly with the use made of a London Economics study on aggregates which has been used to drive forward tax proposals in that area.[40]

19. In view of the evidence presented to us of the potential size of the external costs, we felt that the absence of proper research on this represented a major failing in the Government's approach.[41] Evidence to the Committee suggested that the capital costs involved in removing pesticides from drinking water may be in the order of £1 billion, and that the ongoing operating costs could be "very substantial"—in the order of perhaps hundreds of millions of pounds each year.[42] This implies significant subsidy of intensive agriculture by the water industry and water consumers. In addition, the prices of conventional, as opposed to organic, produce are also being subsidised contrary to the Government's stated aim of encouraging the latter. We were surprised that the Financial Secretary was unable to give any further clarification of the sums involved.[43] Added to these costs would be the financial quantification of the likely environmental damage from pesticides, through the use of contingent valuation techniques (as in the case of the study on aggregates). In view of the widespread evidence of environmental damage referred to above and the extent of public concern, these non-financial costs could be very large.[44]

20. We also noted the scope for future savings in capital costs within the water industry and the innovative scheme adopted in this respect by Wessex Water, involving a subsidy paid by the water company to those farmers who agree to join MAFF's organic farming scheme—although we accept that this initiative was primarily directed towards nitrates rather than pesticides.[45] We fully endorse the comment made by Water UK in their submission that "relying on treatment to correct raw water contamination is not in accord with the 'polluter pays' principle nor is it compatible with long term environmental sustainability. Therefore the objective of water suppliers is to promote agricultural and land use practices which ensure that raw water resources meet the pesticide standard for drinking water without the need for special treatment."[46] We are convinced that there is further scope for concerted action by water companies in this direction. The Government should also examine whether the present incentive in the water regulation regime, to maximise bids for capital investment but minimise outturn, properly contributes to this aim.

Scope for reductions

21. The Committee inquired about the extent of over-use of pesticides by farmers and the scope for them to make cost-effective savings. In their evidence to us, the RSPB quoted figures from two different studies for such savings—£274 million in the 1997 Ecotec report, and £100 million in the study subsequently carried out by Morley Agricultural Consultants Ltd.[47] We were surprised when the NFU, giving evidence jointly with the BAA and Water UK, completely refuted the idea that farmers over-used pesticides at all.[48] This seemed particularly odd given that the second of these studies had been commissioned by the BAA as a critique of the first.

22. In their subsequent submissions to the Committee, both the BAA and NFU acknowledge that there is considerable future scope for further cost-effective reductions over the next 10 years through implementing integrated farming systems and new application technology, but still appear to claim that all farmers currently make optimal use of pesticides.[49] The Committee remains unconvinced by this and notes that the Morley report itself implies savings would be available now if appropriate advice and technology were available to all farmers;[50] while the NFU itself has admitted the scope for improving technology transfer through a low level charge.[51] It is unclear, for example, how many farmers actually employ expert consultancy advice, and we noted some concern about the impartiality of advice given by consultants who themselves work directly or indirectly for the agro-chemical industry.[52] The Pesticides Trust also provided evidence that initiatives such as LIFE and other Integrated Farming Systems projects show that profit margins can be increased while reducing pesticide costs very substantially.[53] Moreover, even if optimal use of pesticides were reached in conventional terms, there remains the scope for further reductions by encouraging more farmers to adopt organic farming techniques.[54]

23. For these reasons we do not agree with the BAA's view that there is little scope for 'additional' pesticide reductions, beyond those which ongoing technical improvements will allow.[55] We were also glad to hear that Treasury do accept there is scope for reductions and that Mr Timms agreed this was indeed the primary objective.[56] We would also make the point that some of the revenues from a pesticides tax could be used with great effect to fund the provision of independent advice for farmers to encourage reductions in pesticide use.

Contribution of a tax

24. The 1997 Ecotec report suggested a number of different possible objectives for a tax—to finance complementary measures, to reduce demand, to encourage farmers to switch to less damaging pesticides (through banding the tax), and to reflect fully the cost externalities arising from pesticides.[57] The Minister told us that the objective should be to reduce demand and encourage, by means of a banded approach, a shift towards less harmful materials.[58] The latest Ecotec report suggested that a 30 per cent level of tax levied on a banded per kg basis might reduce demand by between 8 per cent and 21 per cent, depending on its design; while an unbanded per kg tax might result in a 23 per cent reduction.[59] This would be equivalent to a reduction in sales of £100 million—a not inconsiderable contribution in the view of this Committee and consistent with BAA's estimate of over-use. We also noted that the Minister had been confident a tax could play a useful part in reducing demand; and that the widespread nature of the pollution arising might make a tax particularly appropriate.[60]

25. We discussed in some detail with witnesses the design of a tax and the uncertainties involved in the Ecotec report.[61] We noted the Minister's positive approach to banding the tax in order to provide incentives for farmers to switch to less environmentally damaging chemicals.[62] But environmental organisations were concerned about whether the present banding proposals gave sufficient weight to biodiversity effects. The RSPB felt strongly that further work needed to be done on developing an effective banding structure and that this might take at least a year. The Pesticides Trust, while in principle in favour of this approach, considered that the difficulties involved might be intractable, and that the Government should therefore introduce a flat rate tax. Both organisations considered that the UK could learn from the introduction of pesticides taxes by other EU states—especially France where a banded tax is to be introduced from the start of 2000—and that there was a case for introducing a simple unbanded tax at a lower level.[63] The NFU in oral evidence eventually confirmed the impression given by their submission that they could support a low-level hypothecated tax designed to raise funds for measures to encourage reductions in the use of pesticides.[64]

Economic impact

26. Some organisations expressed concern about the economic impact a tax might have on farmers who were currently on their knees. The NFU pointed to the severe economic damage to UK agriculture which the strength of Sterling and unfavourable developments in world markets has caused since the mid-1990s They suggested that, on the basis of 1997-98 data, a 30 per cent tax would reduce the net farm income figures for cereals and general cropping farms by 27 and 29 per cent respectively.[65] However, the Ecotec report estimated that only 2 per cent of farm enterprises—some 300 farms—would become unprofitable as a result of the introduction of a tax, and that its effects would be insignificant compared to macro-economic changes such as fluctuations in the exchange rate. [66] In addition, the RSPB pointed out that the incidence of the tax would fall most on arable farmers who have in the last decade enjoyed high returns, and who were now down "on one knee, rather than flat on the ground, which is where most farmers are".[67]

27. The Committee acknowledges the extent to which recent surveys have shown significant falls in farm incomes. But in view of the likely incidence of a tax and the extent of cost-effective savings which may be available, we consider that a tax could be introduced in a manner which minimises its adverse economic impact on the farming industry and yet encourages substantial reductions in pesticides use—for example, by hypothecating the revenues. We also noted the suggestion from the Environment Agency that a tax could be a more efficient way to fund the disposal of sheep dip than the current very regressive proposal to levy a flat rate fee of nearly £100 on each sheep farmer.[68] We believe the Government needs to undertake more research on the precise economic impacts of a pesticides tax to satisfy the tests of good taxation set out in the Statement of Intent as well as to inform a proper sustainability appraisal of the measure.

28. All organisations agreed that it was vitally important to introduce measures—such as training and advice for farmers—to disseminate best practice, whether or not a tax was introduced.[69] A tax could, however, be used to finance such initiatives and all parties agreed that it would only be effective if its proceeds were recycled to achieve a degree of fiscal neutrality and to increase elasticity where possible.[70]

Government management and plans

29. We have already noted the lack of a government study on the environmental costs attached to the use of pesticides, and the strong contrast with work on aggregates in this respect where a generally more rigorous approach appears to have been adopted. This is highlighted, as we have pointed out above, by the Government's precipitate announcement to shelve plans to introduce a tax without inviting any critique from interested parties, including environmental organisations, of the agro-chemical industry's proposals for partnership—nor even making those proposals public. We have severe doubts in the light of this about the extent of the Government's commitment to transparency, public accountability and a true 'partnership approach' involving participation from the wider policy community as well as from Government and industry.

30. We found this action all the more surprising as the Minister had been unable to set out any clear criteria by which he intended to judge the voluntary proposals from the industry, or the balance to be struck between the effects of a tax and the voluntary proposals. This decision also appears to prevent consideration of a mixed package of tax together with negotiated agreements and rebates—the model the Government is pursuing in the case of the Climate Change Levy.


Conclusions and recommendations

31. In principle the Committee remains in favour of introducing a pesticides tax as part of a package of measures designed to internalise external environmental costs. We acknowledge the current economic plight of the farming industry, but are convinced that a tax could be introduced in a manner which minimises its adverse economic impact and yet encourages substantial reductions in pesticides use—for example, by hypothecating the revenues. However, we consider that further work needs to be done to research and prepare for the introduction of a tax. The Committee's main conclusions and recommendations are as follows:

32. We are astonished and disappointed that the Government has decided to drop from this year's budget a pesticides tax without even making the industry's alternative proposals public for consultation and discussion. But we welcome the Government's clarification in response to our written concerns that a pesticides tax is still on the long-term agenda. We hope that this situation does not reduce the priority given to the further work we have indicated to be necessary.

33. After almost two years of research, the 1999 Budget announced the abandonment of work on charges for sources of water pollution.[71] With the dropping of a pesticides tax, dormant proposals for taxing fertiliser use may also fall off the agenda. The Government's plans to implement the 'polluter pays' principle in a major area of environmental concern—water resources—seem therefore to have come to nothing. We regard this as a significant failure in its commitment to place the environment at the heart of government and to pursue sustainable development.


14   Pre-Budget Report, Stability and Steady Growth for Britain, Cm 4479, November 1999, paragraph 6.108. This report is hereafter referred to in footnotes as 'PBR 1999' together with the paragraph reference Back

15   QQ 318, 303, 319 Back

16   Ev p233-234 Back

17   Q33. See also Review of usage of pesticides in agriculture and horticulture throughout Great Britain, 1986-96, MAFF 1999, (hereafter referred to as the MAFF pesticide usage report) Back

18   Q4. Ev p18 paragraph 1.2.2 Back

19   Q67 Back

20   Q5 Back

21   Op. cit  Back

22   Ev p7 paragraphs 22-24, pp35-36. QQ314-315 Back

23   MAFF pesticide usage report. Ev p5 paragraph 9 Back

24   Ev p9 paragraph 39 Back

25   Ev pp 5, 17-18, 69. Q10. See also Quality of Life Counts, DETR, December 1999, p44 Back

26   QQ34, 35. Ev pp42-43 Back

27   Ev p5 paragraph 8. Ev pp17-18 Back

28   Q41. Ev p8 paragraph 34ff, p18 paragraph 1.2.3 Back

29   Development of a set of indicators for sustainable agriculture in the UK, MAFF, June 1998. As this report was being prepared MAFF announced the publication of a set of pilot indicators for sustainable agriculture. Back

30   Q70 Back

31   QQ6, 9-11, 34, 73. Ev p8 paragraph 35 Back

32   See for example Protecting Environmentally Sensitive Areas, National Audit Office, HC120 Session 1997-98, July 1997, p21 Back

33   Q294 Back

34   Q20, 29. Ev p6 paragraph 11, p7 paragraphs 18ff Back

35   QQ44, 52 Back

36   DETR Economic Instruments for Pesticide Minimisation, Ecotec 1997. The executive summary is included in DETR's Economic Instruments for Water Pollution, 1997 Back

37   DETR Private Costs and Benefits of Pesticide Minimisation, RPA/Entec 1997 Back

38   DETR Design of a Tax or Charge Scheme for Pesticides, Ecotec 1999 Back

39   Op. cit. pp52-55 Back

40   See paragraph 42 Back

41   Cf QQ 297-299 Back

42   Q60, 61 Back

43   QQ298-299 Back

44   See paragraph 15 Back

45   Q63. Ev p6 paragraph 13 Back

46   Ev p35 Back

47   Ev p2, pp16-17. Q16 Back

48   QQ33, 55 Back

49   Ev pp 41, 43 Back

50   One of the conclusions of the Morley report was that the RPA/Entec study 'correctly identified many pesticide minimisation techniques where improvements and further adoption can be achieved.' Ev p16 Back

51   Q51. See also NFU response to Government consultation on a pesticide tax, Appendix 2 section 3 Back

52   Q19. Ev p7 paragraph 27 Back

53   Ev p8 paragraphs 29-30. Q16 Back

54   Cf the extent to which MAFF's organic farming scheme was over-subscribed, resulting in a temporary deferment of applications received. See MAFF press notices dated 4 October 1999 and 3 November 1999. Back

55   QQ33, 53. Ev p41 Back

56   Q302 and elsewhere Back

57   DETR Economic Instruments for Water Pollution, p65 Back

58   Q304 Back

59   DETR Design of a charge scheme for pesticides, Ecotec 1999 p13 Back

60   QQ304, 311, 76. Ev p5 paragraphs 5, 7-8 Back

61   QQ7-8, 15, 78-87 Back

62   QQ304 Back

63   QQ8, 15, 25-29. Ev p1-2, p7 paragraphs 22-28 Back

64   QQ47-51. See also NFU response to Government consultation on a pesticide tax, Appendix 2 section 3 Back

65   Ev p29 section 5. Back

66   DETR Design of a Tax or Charge Scheme for Pesticides, Ecotec 1999, pp17, 20 Back

67   Q19 Back

68   Ev p46. Q79 Back

69   QQ25, 51-52, 55-58. Ev pp 2, 8, 46, 66, 180-181, 201 Back

70   QQ25, 30, 47-51, 79. Ev p2, 7-8, 46 Back

71   Budget 1999: Building a Stronger Economic Future for Britain, HM Treasury, March 1999, paragraph 5.77 Back


 
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