House of Commons - Environmental Audit

Select Committee on Environmental Audit Fourth Report

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

OTHER ASPECTS OF THE PRE-BUDGET REPORT

Environmental evaluation of budgetary proposals

107. We welcome the inclusion of a separate chapter on protecting the environment within the Pre-Budget Report and note that it reiterates the Government's commitment to "conducting a full evaluation of all impacts on the environment when considering alternative policy options. This applies to all Government measures regardless of whether their aim is environmental".[230] Discussion of environmental considerations is however confined to chapter 6 of the report, and Table 6.1 only summarises the estimated environmental impact of selected tax measures whose primary aim is environmental. The information given in this table also relates only to estimated impacts of existing measures rather than any discussion of options or estimates for different rates of tax for instance. In addition the Table does not seem to constitute a series in that changes to the estimates, whether from changes in assumptions or policy decisions, have not been set out as such but merely presented as bald statements unadorned with explanation or history. Two examples from the 1999 Pre-Budget Report are the figures for the Climate Change Levy (discussed above) and the figures for the Fuel Duty Escalator (discussed below). This does not appear to us to be satisfactory in itself nor does it seem to meet the requirements of the Government's guidance on policy appraisal and the environment.[231] Table 6.1 in the Pre-Budget Report, the 'Green Book', needs more work. It would be particularly improved by reference back to previous estimates when significant changes have occurred and include explanations. When significant policy decisions have been taken then the environmental appraisal of options undertaken should be summarised.

108. More generally, we reiterate the point we have already made in previous reports—that the Pre-Budget Report should assess the environmental impact of the proposals as a whole, including the impact of the main economic forecasts such as growth assumptions on key indicators (perhaps the headline set) which would assist the realisation of the Government's stated aim to secure equal status between GDP, unemployment and inflation figures and the other indicators such as farmland birds. We have previously referred to attempts to produce a single alternative to, or weighted variation of, GDP.[232] An new alternative approach suggested by some academics is to calculate a figure for "years to sustainability". This would indicate how many years it would take us, on the basis of present trends, to reach an environmentally sustainable and stable position.[233] We consider that the Treasury should examine, for inclusion in future Pre-Budget Reports, the potential for meaningful alternative indicators of progress towards sustainability. Future reports should in any case include an assessment of the environmental impact of the proposals they contain and an indication of the implications of economic forecasts for the headline sustainable development indicators.

Ex post evaluation

109. In the Government's reply to the Committee's report on the Budget 1999 it stated that "the Government would expect to publish an ex post evaluation of its existing environmental tax measures on an annual basis... derived using the most up to date modelling."[234] We welcome this commitment as reflecting good practice in testing estimates and assumptions in the light of real data. We look forward to seeing ex post evaluations of each measure as they are produced and would be grateful for an indication of the timetable for this process.

Goods and bads

110. In its Fourth Report of 1998-99, the Committee recommended that Budget documents should include an indicator for the amount of revenue coming from environmental taxes and the Government's success in shifting the burden of tax from "goods" to "bads" in line with the Statement of Intent.[235] We suggested that the Office for National Statistics indicator of environmental tax revenue could be used for that purpose. The issue was raised again with Patricia Hewett MP, then Financial Secretary, in March 1999 who indicated that the Treasury would continue to work with the Office of National Statistics on the issue of what should be defined as an environmental tax and the development of an indicator.[236] The Government response to the Committee's 1999 Budget report did not give any further information on this, pointing only to the inclusion within the "Blue Book" for the first time of a set of UK environmental accounts.[237] We are concerned at the apparent lack of progress in developing an indicator for the shift of the burden of taxation from goods to bads and would welcome further clarification of why the existing ONS indicator is not suitable.

Statement of Intent

111. We were also concerned that the Pre-Budget Report appears to expand and redraft the criteria for environmental taxation included in the original Statement of Intent (HM Treasury, July 1997). In particular, it includes a new requirement that "environmental policies must be based on sound evidence", though it goes on to concede that "uncertainty cannot necessarily be used to justify inaction". Evidence submitted to the Committee, however, suggests that it is often very difficult to monitor environmental impacts and establish causal relationships, as for instance in the effect of pesticides on biodiversity. This requirement would therefore appear to conflict with the precautionary principle, one interpretation of which is that, where uncertainty exists, the most cautious approach should be adopted despite an absence of definitive evidence of harm. We consider that this is a particularly inappropriate criterion to adopt in the light of previous environmental disasters such as the BSE crisis and the legacy of asbestosis.

The role of government procurement

112. In our inquiry into the Greening Government Initiative1999, the Major Contractors Group stated that "it is apparent that Government has yet to implement its stated objectives on sustainability in its current procurement policy for contracting services¼ sustainability and environmental considerations do not yet appear to be adequately specified by Government departments when procuring construction-related products and services."[238] The Government's Panel on Sustainable Development has long called for the Government to use its buying power to encourage markets in sustainable goods and services.[239] The Government has itself acknowledged this aim and the role it can play to make the market for sustainable goods and services more competitive.[240] Government has also undertaken to consider whether to incorporate sustainable development into the aims and objectives of all new bodies.[241]

113. We note the recent proposals for the reform of the Government's arrangements for procurement. Two new bodies are envisaged: the Office of Government Commerce (OGC) (to develop strategic guidance and aggregate purchasing where benefits are predicted) and Partnerships UK to assist the development of public private partnerships (PPP) and private finance initiative (PFI) projects. We found it disappointing that the environmental aspects of procurement did not receive any reference in the remit of either review nor attention in the analyses.[242] More worryingly, the memoranda which we received from the Treasury on this issue reveal that such considerations are not even under consideration as OGC and Partnerships UK are being developed.[243]

114. Treasury's evidence drew a distinction between structures to deliver policy (OGC and Partnerships UK) and the policy itself (in this case set out in a joint Treasury/DETR note on green purchasing). In supplementary memoranda Treasury wrote that "OGC and Partnerships UK will, within their own specific responsibilities for government procurement, be able to consider what might more might be done to get DETR's message across" and that it was not possible to be more precise "until the key structures and objectives are agreed and in place and the bodies are up and running."[244] We cannot help but contrast this with the Prime Minister's commitment that "We must make the process of government green. Environmental considerations must be integrated into all our decisions, regardless of sector. They must be in at the start, not bolted on later".[245]

115. Peter Gershon's review of civil procurement identified a need for a common strategic framework incorporating inter alia common performance measures, key standards and key values. He also concluded that fragmentation resulted in the centre lacking necessary clout to use Government's considerable purchase power to good effect and criticised current practice for its 'risk aversion' and bias towards 'least initial cost', as opposed to whole life costs.[246] These conclusions demonstrate to us that there are significant synergies between efforts to achieve 'good' procurement and efforts to promote 'green' procurement (indeed we see little difference between the two). In our view the Treasury has failed to implement the pan-governmental commitment to consider the incorporation of sustainable development into the aims and objectives of all new bodies with regard to the OGC and Partnerships UK. Given the recognition by all Green Ministers, as well as serious commentators outside Government, of the role of civil procurement in meeting Government targets and promoting sustainable business, we regard this failure as extremely serious. In the light of this we recommend that the Treasury builds environmental objectives into the aims of the OGC and Partnerships UK and includes a representative of DETR on OGC's proposed Supervisory Board.

116. A number of departments are taking steps in their procurement policy to increase the amount of energy from renewable sources in line with the Government's 10 per cent target for the UK as a whole. In view of the fact that the Gershon review particularly identified energy purchases as an area where the aggregation of requirements might produce significant savings,[247] we are concerned that if energy procurement is to be centralised in this way it might adversely affect these initiatives. We welcome and commend Treasury's undertaking that any initiatives resulting from discussion of Peter Gershon's findings on centralised energy purchasing must reflect the Government's targets for achieving energy from renewable sources.

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