Examination of Witnesses (Questions 1
WEDNESDAY 13 DECEMBER 2000
TIMMS MP AND
1. Welcome to the Thatcher room. Delighted to
have you here. Thank you for coming along. We want to concentrate
on the major elements of the Pre-Budget Report (PBR) and one particular
thing is the ending of the automatic fuel duty escalator which
is a significant announcement. We shall lead off on that before
discussing a number of other aspects of your responsibilities
as a Green Minister in the Treasury. Is there anything you want
to say briefly before we begin asking questions?
(Mr Timms) I shall make a few brief remarks, if I
may. Thank you for your welcome and for the opportunity to speak
to the Committee again. May I first of all introduce Clive Maxwell
who is the Head of the Environmental and Transport Tax Team at
the Treasury. Recent events have probably raised the profile of
environmental concerns up and down the country, if anything increasing
the impetus to protect the environment and using natural resources
in line with the concerns of this Committee. That priority was
reflected in the Pre-Budget Report. You mentioned the issue of
fuel duties. Recent oil prices have hit people hard and I think
it was right that we responded to that, but we did so in an environmentally
responsible way and the changes to fuel duties, to vehicle excise
duties, to car taxation rules are all focused on encouraging cleaner
fuels, more efficient vehicles and greener transport. The publication
of the Government's climate change strategy has set out the measures
which will move us towards a more sustainable low carbon economy.
Progress on one of the main elements of that strategy, the climate
change levy which I have talked about to the Committee before,
continues as planned. The levy will come into effect on 1 April
and in the PBR and in the Urban White Paper we have also embraced
Lord Rogers' vision of an urban renaissance to improve cities
to reduce pressure for development on the countryside. There is
a number of measures in the Pre-Budget Report on that. The Rural
White Paper, also published recently, has set out the steps we
are taking towards a countryside which is sustainable economically,
environmentally and socially as well. I hope the Committee can
welcome this continuing progress on the environmental tax agenda
and I shall be very happy to answer the questions you have hinted
at and others as well.
Chairman: Thank you. It is nice to hear
a Minister tackle so many different aspects of Government policy.
2. You referred to the Climate Change Strategy
and the reduction of traffic growth is a key component within
the Climate Change Strategy. Now the fuel duty escalator has been
abandoned, where does that leave fuel duty as a policy aimed to
deliver the reduction in traffic growth?
(Mr Timms) The abolition of the escalator was announced
in the November 1999 Pre-Budget Report when the Chancellor said
that he considered the appropriate rate of fuel duties on a budget
by budget basis, taking into account all of the relevant economic,
social and environmental factors; so fuel duty only increased
by the rate of inflation at the time of the last budget. Taking
into account the strength of the world oil prices, the other measures
we have introduced to tackle climate change, the Chancellor made
a further announcement in the PBR this year that the duty on all
road fuels would be frozen in the coming budget and that will
have the effect of reducing the rate of duty by about one penny
and a half per litre in real terms. Between 1997 and 1999 the
rate of duty on ultra low sulphur diesel was steadily cut relative
to conventional diesel with the effect that within a couple of
years pretty much the entire diesel market was converted to cleaner
fuel, cutting emissions of the most damaging local air pollutants
and enabling the interaction of new pollution-reducing technology.
We have learned from that experience and in October we have already
reduced the rate of duty on ultra low sulphur petrol by one penny
per litre. Last month the Chancellor announced that we want to
go further with that and introduce a further two pence per litre
cut in order to promote the takeup of ultra low sulphur petrol.
The package that the Chancellor announced on fuel duty in November
did reflect widespread concern about the high price of crude oil
and the effect on petrol and diesel prices, as expressed by members
of the public and by hauliers and their concerns about UK competitiveness.
Those were reflected in the Chancellor's announcement but we were
able to make some changes there in an environmentally very effective
way. The announcement was of course a balance, but I hope the
Committee will feel that the balance the Chancellor struck was
3. You mentioned the impact of high oil prices
in leading to the decision to freeze the annual fuel duty rise.
Does it follow therefore that if oil prices start to fall you
will again consider the need for an escalator?
(Mr Timms) We have set out the position for the coming
year. The freeze will apply and we will be going further on ultra
low sulphur petrol and ultra low sulphur diesel, subject to the
conditions which are set out in the PBR about ultra low sulphur
petrol being widely available. That will be the position for the
coming year. We have also said that if the recent high prices
of crude oil continue then we would expect the freeze to apply
for a further year. If on the other hand the price of crude drops
sharply, then that cannot be taken for granted any more. In a
sense the answer to your question is yes.
4. May I compare the impact of the escalator
between 1996 and 1999 and the projected impact of the ten-year
transport plan? We are told that the reduction of carbon between
1996 and 1999 was somewhere between one to 2.5 million tonnes
of carbon (MtC) as a result of the escalator. By contrast the
estimate for the reduction of emissions as a result of the ten-year
transport plan is going to be about 1.6 MtC of carbon. By contrast
the escalator seems to have been a very, very effective means
of reducing emissions. Does it not follow then that at some stage
in the future, if we are serious about meeting the Kyoto targets,
we have to return to the fuel duty escalator?
(Mr Timms) It is true that quite a large share of
the reduction in emissions which would be achieved to meet the
Kyoto targets, and go further in the case of the UK, has been
borne by the transport sector. However, the climate change strategy
which we published sets out quite a wide range of measures alongside
the one you have mentioned which will also reduce emissions: the
climate change levy in particular is a substantial contribution,
the emissions trading scheme which we are developing, some changes
to company car tax also which we reckon will save up to one million
tonnes of carbon as well. The point I want to make is that we
have a wide range of policy strands to address the reduction in
CO2 emissions, not only the transport ones but others as well
and between them those will take us to the Kyoto target and indeed
beyond that. In the longer term of course calls are already being
made for much much deeper reductions in CO2 emissions and I have
no doubt at all that the targets set at Kyoto are not going to
be the end of the story and we need to revisit all of these issues
in due course. The strategy which we have published, the measures
we have taken, will achieve the Kyoto objectives and go beyond
them in fact and then we shall need to do some completely fresh
thinking about where we go in the longer term.
5. May I turn to the principles underlying the
green taxation programme, the polluter pays principle? There is
now general agreement that the polluter should face the true costs
of the environmental damage they cause. In terms of the transport
sector, what work has been done and what evidence is there for
the true environmental cost caused by domestic transport in private
cars and the haulage industry? Do we have some indicators as to
what the true cost is by which we could measure the cost which
needs to be recouped through environmental taxation?
(Mr Timms) One of the pieces of work which I am aware
of has been the environmental costs of lorries and that is informing
the review of lorry vehicle excise duty which is under way at
the moment and we are anxious that the new scheme will reflect
more fully the environmental costs associated with each kind of
lorry than the present arrangements do. That is a particular piece
of work I am aware of.
(Mr Maxwell) The only other thing to mention is the
transport modal studies that the DETR have said they will be carrying
out over the next year or two as part of their longer term work
on inter-urban road charging issues.
6. You see my point. If there is not at the
moment a published body of evidence as to the true environmental
costs then it is very difficult to assess the extent to which
the taxation regime is making the polluter pay. We need both sides
of the equation to come to some assessment of the effectiveness
of the overall policy.
(Mr Timms) In a lot of these areas there is still
quite a lot of exploration on the regional thinking going on and
being required and gradually a fuller picture is emerging. Certainly
there are still some gaps and I accept that.
7. May I continue this theme of environmental
damage? Where do you think the environmental damage is greatest
within the transport sector and how is the fuel duty policy responding
(Mr Timms) I suppose it depends how you measure the
scale. There are different ways one could measure it. Clearly
there are serious CO2 emission problems; very large amounts of
CO2 emissions. Significant local air pollution problems are also
being caused in the transport sector and the policies we have
put in place are seeking to address both of those and to do so
in an increasingly sophisticated way. The effect of the fuel duty
escalator is referred to and the new arrangements we have for
vehicle excise duty and also company car tax reflect the amount
of CO2 emissions being generated by the vehicles and the amount
of duty which is payable depends on the amount of emissions, the
amount of tax in the case of company car tax depends on emissions.
In both of those schemes there is also a supplement for diesel
engines reflecting the fact that there are relatively more problems
with local air pollution on diesel engines than on petrol engines
which have the same CO2 emissions. We now have quite a sophisticated
array of measures in place to address both those problems.
8. Just finally to focus on the question of
the diesel engine and the haulage industry, I think it would be
agreed that it is the older lorries used in the haulage industry
which contribute disproportionately to total emissions, but at
the same time in the Pre-Budget statement we have a package of
measures which actually reduces the volume of taxation on the
haulage industry. How do you reconcile this apparent contradiction
with the haulage industry contributing most to environmental damage
but at the same time having received the greatest benefits in
terms of tax reductions in the Pre-Budget statement?
(Mr Timms) A process is going on of switching the
burden of taxation from ownership to usage and it is true we shall
be reducing the amount of vehicle excise duty which is payable
but we have not introduced the essential users fuel duty rebate
which was being proposed and that is partly for the reason you
have set out. In addition to that I have said that the new vehicle
excise duty scheme will encourage cleaner vehicles and in addition
we have announced the £100 million ringfenced fund to be
available over a three-year period for incentives to encourage
the modernisation of the vehicle fleet in the haulage industry,
including encouragement for cleaner lorries and new technology.
We have been able to make progress on that front as well.
9. Just on this lorry point, the DETR sustainable
distribution strategy said that the impact of lorries is the equivalent
of £28,000 per vehicle; a very large sum. I do not know whether
we are near that in terms of actually offsetting that pollution
effect, but surely Mr Chaytor is right in saying that we are going
to lessen the effect, whatever effect we are having, as a result
of your changes.
(Mr Timms) I hope that we can improve the incentives
in the scheme for cleaner lorries by the changes we are making
on vehicle excise duty and with the ringfenced fund, also by improved
driver training. There is quite a lot which can be done to reduce
the environmental costs of lorries and two or three of the elements
of the package are directed towards improving the environmental
signals we are providing through the tax system. I am not familiar
with that total figure or how that matches up to the total amount.
10. Perhaps Mr Maxwell has a view.
(Mr Maxwell) No, not on that in particular I am afraid.
It is obviously the case that the measures announced are more
to do with encouraging and incentivising particular shifts in
behaviour and shifts in the choice of lorry driven or the types
of engines used rather than internalising every single cost. It
is a bit of both going on.
11. I wanted to follow up the point Mr Chaytor
asked about regarding the impact, where the greatest environmental
damage was from. In particular I have in mind private car use
when asking this. Would you agree that the price of fuel is lowest
in the areas of the greatest pollution? If we are looking at urban
areas we find the market looking to deliver low cost fuel for
private motorists where the supermarkets are congregating and
in competition with each other, with different incentive schemes
to buy £20 of goods in the supermarket and get £10 off
your fuel bill and so forth. On the other hand the price of fuel
is highest in the areas where private car use is most essential
and I am thinking in particular of rural areas where there are
fewer alternatives and fewer choices in terms of transport switching.
Though a lot of that is about the market, there is obviously an
interaction with fuel prices, fuel duty and any other incentives
the Treasury might decide to bring in. I wanted to ask you whether
you accepted that premise, whether that shows that competition
is not working very well towards your aims within the Government
and that the market is not helping you in this regard and whether
you have considered any other fiscal measures which could change
that market pressure. A windfall tax on oil company profits is
one thing which was floated and we certainly saw their profits
soar during the fuel crisis, which seems to suggest that as well
as fuel duty, there is a question about the way the market works
and delivers fuel to the consumer and the way that is not going
hand in hand with the environmental objectives.
(Mr Timms) I am obviously aware that there is variation
in the price of petrol in different parts of the country. I think
that is a matter which is determined largely by the market; certainly
I have not seen any evidence of a failure of competition in the
supply of petrol in different parts of the country. I know that
has been looked at from time to time by the competition authorities
but as far as I can see the competition is pretty effective in
the supply of petrol around the country. I am not sure whether
this is one of the things you were driving at but from time to
time there are suggestions that we ought to have different rates
of fuel duty in different parts of the country. That is not something
I favour. It would be extraordinarily difficult to implement and
it would create no end of problems and would almost certainly
be illegal under EU rules anyway. We have not looked at tax measures
which might have an impact and we are not proposing a windfall
tax on the oil companies either.
12. If we look at the real costs of motoring
over a long period the UK sustainable development indicators show
that from 1974 to 1998 the real cost of motoring hardly changed,
whereas public transport fares have gone up by 50 per cent, disposable
income had gone up very significantly. Why do you think then that
motorists have this perception that they are being unduly taxed?
If we compare with other things which are taxed higher, like cigarettes
or alcohol, I am sure if you went into the nearest pub and you
asked everybody in there they would say yes, there is too much
tax on beer, but it does not seem to provoke the same reaction
that there has been on fuel. Why do you think it is that people
have that perception?
(Mr Timms) I do not know. I suspect you are probably
in as good a position as I am to provide an explanation for that.
What has happened is that there has been something of a switch
in the overall cost of motoring and that the costs of ownership
and the element of that total accounted for by the cost of owning
a car have fallen, whereas the running costs have not. The two
of them together have been broadly unchanged over a couple of
decades or longer. Maybe what has happened on the running cost
side has had a disproportionately greater impact on people's consciousness
than one would have expected.
13. Do you think perhaps there has not been
sufficient effort to highlight publicly the environmental rationale
for fuel duty? It was quite noticeable during the fuel crisis
that we had Prime Minister, Chancellor, talking about the possible
economic effects on spending on hospitals, on schools, if there
were changes in the rates of duties. A great deal was not said
about fuel duty. Is that part of the reason, perhaps over a number
of years, that that rationale has not been delivered publicly?
(Mr Timms) I think we have said quite a lot about
the environmental benefits of the fuel duty escalator; certainly
I have talked about it at some length and others have done as
well. It was a very important element of the justification for
the policy. We have talked about it pretty widely. The financial
aspects are important as well but I do not think we have downplayed
the environmental aspects of this.
14. You said earlier that you thought if all
prices were to drop dramatically then the Chancellor would reconsider.
The freeze would stay if prices stay as they are or certainly
if they go up. Does that mean that you have really given up on
price mechanisms in a sense and think that current prices are
as high as they need to go? If we want to encourage fuel efficient
motoring, want to encourage unnecessary journeys, we have the
prices as high as they need to be?
(Mr Timms) I do not think we have considered it in
those terms. Clearly the fact that crude prices are so high has
a significant impact on prices and therefore without any more
needing to be done on the duty side, the relatively high prices
do their job in the way that the escalator was intended to. I
do not think I would want to speculate about what might happen
in the future or how we would respond to that. Those are decisions
which can only be made in the light of all the circumstances at
15. Is there a view that rather than using price
as a major mechanism for discouraging unnecessary journeys we
should look at other mechanisms?
(Mr Timms) We are looking at a variety of mechanisms,
not only for discouraging journeys but for the ten-year plan for
transport which will involve very substantial investments in public
transport, so encouraging people to use public transport alternatives.
There are the incentives for cleaner engines which the tax system
is increasingly presenting, so the journeys which are being run
will be more environmentally benign than they have been in the
past. A wide range of initiatives needs to be taken and is being
taken to ensure that transport is increasingly operating in a
16. Is that what the Chancellor was referring
to in the Pre-Budget speech in 1999 when he announced the decision
to stop the escalator and make decisions budget by budget? He
said then, "... having cut the deficit and introduced our
new environmental policies, we are now in a position" to
abandon the escalator and work budget by budget. Are those the
sort of new environmental policies he was referring to?
(Mr Timms) The point he made was that he wanted to
determine the level of duty on the basis of the economic, social
and environmental, all of those, considerations year by year.
17. He seemed to be suggesting that there were
alternatives now. We have new environmental policies therefore
we do not need the escalator any more. I just want to be clear
exactly what those new environmental polices are supposed to be.
(Mr Timms) On the climate change side, the climate
change strategy has set them out. I mentioned some of them: the
climate change levy for example, the new arrangements for company
car taxation. So there are several clubs at our disposal which
are having the effect of reducing emissions across the economy.
Because of the effect of all of those we shall achieve the Kyoto
objectives and indeed do better than that. The fuel duty escalator
for the period it was in operation made a very significant contribution,
but there are other measures now in place as well.
18. Forgive me, Minister, you may not like my
first question but it is prompted by that answer. You were asked
about what the Chancellor had in mind in the 1999 budget when
he removed the fuel tax escalator. You said there are environmental,
there are economic and there are social reasons. Surely with more
candour could you not also say that there are political reasons
and that there may be very strong environmental reasons why we
should continue a particular tax, but politically you find it
too difficult to do at the moment? What is the problem? Why does
the Government not just say that? Is that not the honest truth?
(Mr Timms) There is not a chasm between economic,
environmental and social considerations on the one hand and political
considerations on the other. The position we were in in 1999 was
that the fuel duty escalator had been operating since 1993, had
contributed to a significant increase in the price of petrol and
diesel and had had very significant environmental benefits. I
do not think it was ever envisaged that the escalator would go
on and on for ever; apart from economic considerations one has
to bear in mind what other countries are doing. It is not the
case that we can set our fuel duties entirely disregarding what
is happening elsewhere. We have to take account of that. That
is one of the economic considerations the Chancellor takes into
account. I stand by the point I made, recognising that economic,
social and environmental considerations always have political
implications as well.
19. I want to ask some more about the point
you made about relative fuel prices but before I do, is it your
view now that the price of oil produced by a number of external
factors to the Government is such that it really replaces the
need for the fuel tax escalator? It serves the same purpose.
(Mr Timms) It certainly has a bearing on the decision
made each year about what the level of fuel duty should be. Yes,
that is undoubtedly the case. Whatever the level of oil prices
was to be, I do not think it was ever intended that the escalator
would go on indefinitely.