Abandonment of the fuel duty escalator
117. One other major environmental tax announcement
in the 1999 Pre-Budget Report was the effective abandonment of
the fuel duty escalator. The level of fuel duties will not be
incremented automatically in future but will be decided on a budget
by budget basis.[248]
Revenues from any real term increases will, however, be hypothecated
and used to improve public transport and modernise the road network.
The escalator was introduced in 1993 initially at 3 per cent above
inflation but was soon raised to 5 per cent. In 1997, the present
Government maintained its commitment to the escalator and increased
its rate to 6 per cent. The escalator has given a clear signal
to the transport sector and the public to design more fuel efficient
vehicles and seek other ways of reducing fuel costs; and it has
been generally acclaimed by environmentalists here and abroad
as a flagship environmental tax measure.[249]
118. We acknowledge that opposition from both the
haulage and rural sectors to the escalator has grown markedly
in recent years, and that in some areas where there is little
real alternative to private transport, it has had little effect
on demand. We also note that the EU agreement with the European
and oriental car industry should result in significant further
reductions in emissions.[250]
However, the 1999 Pre-Budget Report acknowledged that increases
since 1996 will result in savings of between 1 million and 2.5
million tonnes of carbon by 2010. We note that the 1999 Budget
estimated possible savings of 2 million to 5 million tonnes if
the escalator were maintained to 2002 . This suggests that the
effect of the Government's decision has halved potential future
reductions in carbon dioxide emissions. As referred to above,
the Pre-Budget Report itself did not set out this decrease in
impact nor did it contain any appraisal of the relative economic,
distributional and environmental merits of the move (something
that surely will be necessary at least for 2000-01 to implement
a budget-by-budget decision for the forthcoming Budget).
119. In addition, recent modelling by Cambridge Econometrics
suggests that the removal of the escalator will in fact result
in carbon emissions being some 4 million tonnes higher by 2010
than they otherwise would had the escalator been maintained to
2010. They point out that this will entirely wipe out the reductions
expected from the Climate Change Levy and the negotiated agreements.[251]
We consider that the failure to publish an environmental impact
assessment on the likely effect of abandoning the fuel duty escalator
reveals how far we still need to go to place sustainable development
at the heart of policy making, and would urge the Government to
rectify matters.
120. However, whatever the level of detail available
on the fuel duty escalator or on the Climate Change Levy, any
debate of the merits of decisions taken has had to take place
in a total vacuum without the context that only the full Climate
Change Programme can provide. We agree with Mr Timms that progress
can be made without waiting for the overall strategy but at this
stage it is obviously impossible for outside commentators to assess
the loss of the fuel duty escalator (and between 1 to 4 MtC worth
of reductions) when unable to judge the credibility of the Government's
alternative proposals, assumptions and estimates. We urge the
Government to publish the full draft Climate Change Programme
and the now infamous DTI energy projections (first promised to
us by a Minister for after the Budget in March 1999).[252]
121. Many organisations have commented in their evidence
to us that uncertainty about future policy intentions and tax
levels damages the ability of UK business to plan strategically.[253]
We also recognise that major changes in the price of crude oil
can also have significant impact on the price of petrol. We agree
therefore that it might be appropriate to vary escalator increases
each year in order to maintain a steady and moderate increase
in prices. We think that the Government should avoid any ambiguity,
whether unintentional or not, and clarify what criteria future
price increases will be based on in order to give a long term
signal.
VAT on energy saving measures
122. In previous reports, the Committee has discussed
the problems of reducing VAT on energy saving measures in relation
to various EC directives.[254]
It noted that a possible alternative was to support an EC proposal
to reduce VAT for local labour intensive services and apply the
reductions to all installations of energy saving materials.[255]
We now understand that France has made an application to the EC
under the proposed scheme, and, indeed, implemented a reduced
rate for renovation services before the regulation was introduced
to fit in with its budget cycle. We asked the Treasury how the
UK intended to respond. Treasury wrote that the Government had
not expressed any interest in applying for this scheme, as it
believed it was tackling unemployment more effectively by other
policy means.[256]
123. In oral evidence, the Financial Secretary again
expressed no interest in taking advantage of the scheme, referring
only to the fact that the problem which was being addressed in
France was being addressed rather differently in the UK. In asking
for a supplementary memorandum the Committee noted that the Government
had indeed applied for a reduced rate of VAT on refurbishment
services under this scheme on behalf of the Isle of Man. In response
the Treasury conceded that the UK had in fact also reserved its
position with respect to the rest of the UK.[257]
We were surprised and disappointed that the Financial Secretary
was unable to acknowledge the UK's interest in the EU reduced
VAT scheme in oral evidence to us. Although primarily targeted
at unemployment, we remain of the opinion that the scheme offers
an opportunity to apply a reduced rate of VAT to the installation
of energy saving measures (albeit not DIY materials) thus providing
a way around the barrier of the Sixth VAT Directive.
124. We also asked Mr Timms what plans he had to
try to extend the applicability of the reduced rate of VAT within
the main Directive. He confirmed again that in his opinion the
UK had gone as far as it could in this direction by implementing
from July 1998 a reduced rate of VAT for the installation of energy
saving materials in social housing.[258]
We expressed our concern about the priority which Ministers had
given this as reflected in the number of ministerial discussions
and letters on this subject. Treasury subsequently revealed that
since making a commitment in 1997 to "explore the possibility
with European Union partners and the European Commission for a
reduced rate of VAT for a ... range of energy saving materials",[259]
UK Ministers had written once to the Commission, raised the matter
once in a meeting with the Commissioner for the Internal Market
and Taxation but not with EU partners at all.[260]
We recognise that there is a review of all reduced VAT rates due
this year and we hope that Ministers have been keeping their powder
dry so as to be able to achieve real progress on this issue.
230 PBR paragraph 6.109 Back
231
Policy Appraisal and the Environment, DETR 1998 Back
232
Eighth Report Session 1998-99, HC326, paragraphs 25-34 Back
233
Eg Estimating Sustainability Gaps for the UK, Forum for
the Future, January 2000 Back
234 Appendix
1 Back
235
Fourth Report, 1998-99, HC93, paragraph 27. The Statement of
Intent is reproduced in the Committee's Third Report 1997-98,
HC 985 Back
236
Eighth Report, 1998-99, HC326, p17 Back
237
Appendix 1 Back
238
Sixth Report, 1998-99, HC426-III, p288 paragraph 18 Back
239
British Government Panel on Sustainable Development, Third Report,
January 1997 Back
240
Green Ministers Committee report, page 35 Back
241
Ibid, p29 paragraph 6.2 Back
242
Ev p130 Back
243
Ev p130 Back
244
Ev p155 Back
245 Address
by the Prime Minister, Rt Hon Tony Blair, MP, to the Special Session
of the UN General Assembly on Sustainable Development, June 1997 Back
246
Review of Civil Procurement in Central Government, April
1999, paragraphs A6, B1, E2 and F5 Back
247 Ibid,
paragraph A3 Back
248
PBR paragraph 6.61 Back
249
See for example 18th report from the Royal Commission on Environmental
Pollution, Transport and the Environment, p110-114, Cm
2674 Back
250
Q242 Back
251
UK Energy and the Environment, Cambridge Econometrics,
January 2000 Back
252
See paragraph 79 Back
253
See for example HC 547, 1997-98, p92 Back
254
Seventh Report 1998-99, HC 159, paragraphs 75-76 Back
255
Ibid, paragraph 76 Back
256
Ev p154 paragraph 5f Back
257
Op. cit Back
258
Q413. Ev p153 paragraph 5 Back
259
PBR 1997, p60, paragraph 5.19 Back
260
Ev p155 paragraph 6 Back