Select Committee on Environmental Audit Minutes of Evidence


Memorandum from British Agrochemicals Association

1.  INTRODUCTION

  1.1  The British Agrochemicals Association (BAA) is the United Kingdom trade body representing those companies engaged in the manufacture, formulation and distribution of pesticide products for agriculture, forestry, horticulture, gardening, industrial, amenity and Local Authority uses. The Association's members account for more than 95 per cent of sales in the UK crop protection market at manufacturer level and approximately 80 per cent of the market at distributor level.

  1.2  The BAA is an active member of the European Crop Protection Association that represents the industry within the European Union and the Global Crop Protection Federation that has a similar role world-wide.

  1.3  As the voice of the crop protection industry within Great Britain, BAA's aims and objectives are in line with the Government's policy of optimising the use of crop protection chemicals for the effective control of pests whilst protecting food, human health and the environment.

  1.4  The crop protection sector is a dynamic part of the UK chemicals industry and has close connections with the pharmaceuticals and fine chemicals sectors. Member companies had total sales in 1998 of £480 million and significantly contributed to foreign earnings with export sales of £1,096 million. Member companies employ a total of 8,000 staff. The crop protection sector is innovative and has always been at the forefront of technical developments. It maintains a close and vibrant relationship with Universities and other research institutes both in the UK and abroad.

2.  BACKGROUND

  2.1  In their last administration the Conservative Government started to examine the concept of taxing pesticide usage and commissioned some research. This report, "Economic Instruments for Pesticides Minimisation" ECOTEC 1997 was subsequently published as a supporting document for the government's consultation paper, "Economic Instruments for Water Pollution".

  2.2  Following the 1997 General Election the Labour Government issued a statement of intent on environmental taxation. In November 1997 they published the consultation paper, "Economic Instruments for Water Pollution". Although there was no formal response to this consultation the DETR then decided to commission a further study from ECOTEC Research and Consulting Ltd on the design of a tax or a charge for pesticides. This was published in March 1999 and HM Treasury opened a second consultation on matters arising from the study.

  2.3  Since the Government have undertaken only one study of the tax proposal most comments in this evidence refer to the ECOTEC study.

3.  GOOD TAXATION

  3.1  The Government's criterion for good environmental taxation is premised on ensuring that economic growth is environmentally sustainable. To this end Government specify that environmental taxes must:

    —  Be well designed, to meet objectives without undesirable side-effects;

    —  Keep dead-weight compliance costs to a minimum; and

    —  Ensure that distributional impact is acceptable; and that care must be had to implications for international competitiveness.

  3.2  We believe that the proposed economic instrument (as described in the ECOTEC study) does not meet any of these criteria. First, it is poorly designed. In addition to its potential complexity, precise measurable objectives have not been defined. Given this, it is difficult to judge whether it will meet its aims. Moreover there is potential for undesirable side effects. Research by ADAS Consulting Ltd has shown that a tax may encourage farmers to consider techniques, which lead to increased risks of water pollution by nitrogen, less than optimal use of pesticides, and increased use of the currently less regulated group of chemicals known as adjuvants. Other research highlights the adverse effects of cultivation on soil fauna and soil erosion. In addition it is likely to be costly to administer. On a related point, we are concerned that there has been no detailed evidence provided on the cost of compliance, administration or enforcement.

  3.3  The distributional impact of the tax is likely to be inequitable. The economic burden of the tax will fall on arable and horticultural farmers so that certain crops and food processing sectors will be badly affected.

  3.4  It will damage growth and employment in the agricultural industry, its supply sectors and the food processing industry. This will certainly reduce the UK's international competitiveness as well as its sustainability. Increases in input prices will mean that, where increased costs can be absorbed, UK farmers will suffer reduced incomes. Where this is not possible UK competitiveness may be adversely affected. Food imports may then increase, reducing our balance of payments. This is contrary to the aims of CAP reform and a wider European debate would be required.

4.  THE ROLE OF GOVERNMENT DEPARTMENTS IN THE PROCESS

  4.1  We believe that the consideration of this proposal has exposed deep divisions between the two principal Government departments. In essence this epitomises the divisions in public opinion between those who understand the role of crop protection in food production and those more fundamentally opposed to the use of pesticides for mainly philosophical reasons.

  4.2  MAFF have an excellent understanding of UK agriculture and the requirements of crop protection within the UK cropping sector. MAFF are responsible for pesticide safety matters and operate the regulatory system by which pesticide usage is primarily controlled. The Minister of Agriculture has clearly stated his opposition to the tax proposal throughout the past year. Not only does he understand the depths of the present farming crisis but he also appreciates the broad range of measures used by his department and the farming industry to ensure the safe use of pesticides in a way that minimises environmental impacts.

  4.3  In contrast the DETR have a role as guardians of the environment. They appear to have a more superficial understanding of many of the physical, external and cultural processes that impact upon UK farming. The Minister for the Environment is the clear champion of the pesticide tax proposal. His department appear to have taken few steps to gain an understanding of the crop production process. Mr Meacher is on record as saying that his department have "residual concerns" about the regulatory process for pesticides although they are a part of it. It is interesting that the DETR does not appear to have entered into dialogue with MAFF over their concerns about the regulatory process

  4.4  It is widely accepted that the UK regulatory system is one of the best in the world. Thus the industry remains somewhat puzzled by the stated position and by the failure of Government to communicate effectively and impartially the high standards of the MAFF/PSD system. In order to identify the "residual concerns" the Government should undertake a thorough review of the issues surrounding these fears and how best to communicate on the effectiveness of its policies.

5.  THE CONSIDERATION OF THE TAX OR CHARGE PROPOSAL

  5.1  The key element of the tax consideration appears to be the study conducted for the Department of the Environment, Transport and the Regions by ECOTEC Research and Consulting Ltd. For an issue so important to UK farming it appears odd that a Government department has contracted the assistance of an organisation with few apparent strengths in the fields of agriculture, crop protection or agricultural economics.

  5.2  The fulcrum of this proposal is the ECOTEC study. Although the BAA has made detailed comments to officials at H M Treasury and other key departments, the following points summarise our observations.

  5.3  We are of the opinion that Part A of the report which sought to lay out the rationale for a tax, is poorly researched and written. The rationale is over-dependant on a few references and makes no attempt to differentiate between information derived from different countries. The types of crops and methods of growing them differ between countries. For these reasons it is not appropriate to assume that data from countries like the USA, on issues such as pesticide residues on food, are relevant to the UK. Further the general coverage of Part A is rather biased towards the disadvantages of pesticide use and does not present any information relating to the benefits of pesticide use.

  5.4  It is pertinent that much of the extremely valuable information about trends in pesticide usage derived by the Pesticide Usage Survey collected by scientists at the Central Science Laboratory of MAFF have been omitted.

  5.5  The ECOTEC report makes frequent reference to the supposed effect of pesticides on the environment without offering any substantive evidence. We believe that existing policy and voluntary measures already being undertaken by the industry are the most effective means of allaying concerns over pesticide use and achieving further improvements in environmental quality. Current policy measures are already delivering significant improvements in general environmental quality.

  5.6  In order for the crop protection industry to improve current policy measures still further, Government needs to be more precise about its objectives and how it intends to measure improvements in pesticide risk and hazard reduction. Only then can the industry put forward specific suggestions to enhance the effectiveness of existing policies.

  5.7  The ECOTEC study appears to completely overlook the fact that, within the UK, the regulatory system grants approvals to products and not active ingredients. It not only takes account of the intrinsic properties of the active ingredient but also the effects of the formulation, label advice, packaging and the way in which the product should be used.

  5.8  The report also ignores the high economic burden placed on manufacturers by the UK and European regulatory system. Data requirements for new and existing products are becoming ever more stringent and costly. The typical research and development costs for a new pesticide are £30-40 million. This requires 8-10 years of investment prior to commercialisation. This investment has to be recouped in the remaining 10-12 years of patent protection. In addition, following product registration, a typical company will continue to invest in further research costing around £1-3 million per annum for their current product portfolio.

  5.9  The reality is that pesticide use is price inelastic and so the intended consequences will not be achieved. Prima-facie it may seem that a tax banded by environmental hazard might be a good idea, particularly if the tax design was to encourage product switching. This has worked well in the case of petrol with the switch from leaded to unleaded. However, with over 450 active ingredients, over 3,000 crop protection products and at least 4,300 crop/pest situations, the complexity of a banding system would be such that inevitably perverse effects would arise. Moreover the methodology used in the ECOTEC report is based on hazard and not risk. While hazard is an inherent property of the product, risk only occurs when the product is used and harm may take place if the product is used inappropriately. In many situations whilst the product has hazards, it is used in situations where the risks are minimal or where harm will not occur. The ECOTEC methodology means that farmers who use pesticides in a way which minimises risk and without causing harm would nonetheless be taxed on the intrinsic properties of the product. This is manifestly unfair.

  5.10  The practical application of a tax is dependant on placing pesticides into "bands" of toxicity or hazard. The tax banding mechanism in the proposal is so flawed that it will not deliver any significant environmental benefits. There are inherent problems in the processes used to arrive at each pesticide's tax banding. The two put forward in the ECOTEC study tried to boil down into a single numerical rating the many and various impacts of an active ingredient on different life forms. One process used complex mathematical formulae which were dependant on having good data. The mathematics were also problematic. The ranking and weighting system used meant that even substances commonly thought to be benign, such as water, could get a positive score.

  5.11  The other was based on risk phrases on product labels. This approach is implicitly dominated by operator safety which as the ECOTEC report states is not an issue in the UK. Insufficient discussion had been given to the issue of alternatives. In practice, label restrictions and differences in relative efficacy severely restricted product choice and even when alternatives exist there was no guarantee they would be in a lower hazard band. This lack of real alternatives will severely restrict any environmental benefits which could accrue from such a tax.

  5.12  Insufficient discussion is given to the existence of real alternatives for many pesticides. In practice label restrictions and differences in relative efficacy severely restricts the choice of alternative products. Even when alternatives do exist there is no guarantee that they would be in a lower hazard band than the original choice.

  5.13  Continuing pressure on farm incomes means that farmers are re-evaluating their inputs to achieve the right economic balance. Pesticides are a costly input which farmers only use out of necessity. Such behaviour is unlikely to be altered by the introduction of a tax.

  5.14  Farmers already use a wide range of techniques to achieve satisfactory crop protection, a profitable enterprise and a marketable product. These approaches have been developed from initial research to the current best available practical standards such as "integrated farming systems".

  5.15  It is disappointing to see that the ECOTEC report does not explain the complex decision tree that the farmer or his advisor has to follow when making a decision concerning which product to use. To a layman all pesticides are the same but in practice the analysis of the options is the same as the process a doctor might follow when reviewing a patient's symptoms and the appropriate treatment. Rationalising from the 4,000 crop protection products to the 2-3 potential candidates is a matter of technical knowledge and experience. There are many factors that have to be assessed before deciding whether to treat and what product is most appropriate.

  5.16  The report fails to recognise that in the majority of crop x pest x season scenarios there is a very limited range of products that can be used. Even when there is a choice between two products these are very likely to belong to the same chemical group and thus be taxed at a similar level. For more than 1200 crop/pest situations, farmers will not have a choice and the very viability of growing that crop will be questioned.

  5.17  We do not believe that the 1996 data used in the study are relevant to the current economic climate. Farm incomes have changed significantly from that time and 1998 data would give a more realistic picture of current and future trends.

  5.18  The BAA commissioned two reviews of the ECOTEC study by CEAS Consultants (Wye) Ltd and these have been submitted to the Environmental Audit Committee separately. The main conclusions are that:

    —  The ECOTEC report does not consider the impact of a banded tax mechanism (ie, a more efficient form of taxation from an environmental and health cost perspective) in any detail. It initially states that analysis has been undertaken that focuses on the development of six different tax scenarios (ad valorem tax, tax per dose and tax per kg on the unbanded and banded products respectively). However, in most cases, the analysis presented is largely limited to the scenario of an ad valorem tax on unbanded products.

    —  The analysis is based on assumptions on own-price elasticities and a series of assumptions on the pass-through of the tax. This approach produces a wide spectrum of results. The analysis does not consider the important issue of cross-price elasticities and thus overlooks the possibility of post-tax substitution by farmers between different products and even other, non-pesticide inputs. As a consequence, the impact of the tax on aggregate sales is likely to be over-estimated.

    —  The method by which the analytical tools (ie, own-price elasticities) are applied in order to assess the impact of the tax is not described or discussed in detail. This leaves many unanswered questions as to how the impact of the tax was estimated.

    —  The analysis of the impact of the tax is not consistent. Different assumptions are utilised to quantify the impact on different sectors. For example, whilst own-price elasticities are used to assess the reduction in pesticide use and the impact of the tax on aggregate sales, the analysis of on-farm income ignores the existence of elasticities. It is based on the assumption that farmers will not reduce their use of pesticides at all. As a consequence, the analysis of the impact on farm income is clearly inconsistent with the analysis of the impact on aggregate sales.

    —  The ECOTEC report appears to confuse the inherent income instability of the arable sector with the magnitude of the tax impact.

  5.19  The philosophy supporting the tax proposal appears to suggest that adverse environmental impacts result from pesticide use and that in particular these have a significant impact on the quality of water. This appears to be behind the unstated objectives of the tax. In order to clearly identify these objectives and to show how they could be measured we would propose that the Government should undertake a co-ordinated programme of research.

6.  CONCLUSIONS

  6.1  It appears that the entire consideration of this proposal has been based on philosophical dogmas and a basic misunderstanding of UK farming practices. Trends in the use and application of crop protection chemicals appear to have been overlooked.

  6.2  We conclude that the ECOTEC report has failed to show that there are any environmental hazards associated with approved pesticides that cannot be addressed by either the UK approvals system or appropriate management during handling and application. The proposal is constructed upon a "banding" system and charging mechanism that are flawed at almost every level. The implementation of a tax based on such incomplete mechanisms will only serve to reduce farmer incomes and cause confusion amongst pesticide users. It may also distract attention away from continuing work to improve the efficient use of pesticides in UK crop production.

September 1999


 
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