Select Committee on Environmental Audit Second Report


The "new environmental policies"

39. The Committee questioned Mr Timms on the Government's "new environmental policies" which meant that the FDE was no longer needed. Mr Timms felt that the Government's climate change programme had set out the measures which would move the UK to a more sustainable, low carbon economy. He told the Committee that the Government had a wide range of policy strands, not only the transport ones, to address the reduction in carbon dioxide emissions which were set out in the climate change programme. He pointed to the climate change levy in particular as a substantial contribution as well as the emissions trading scheme which is being developed, and changes to company car taxation—Mr Timms told us that the Treasury expected the latter to save up to one million tonnes of carbon.[90] He saw no element of substitution between the FDE and the Climate Change Levy even though the Chancellor's Pre-Budget statement implied this. Mr Timms felt that the Government had taken "a series of steps" to ensure that emissions were addressed wherever they were generated across the economy.[91]

40. The UK Climate Change Programme was published in November 2000 and outlines how the UK intends to meet its Kyoto commitments. The key measures it cites to cut emissions from the transport sector are:

    —  the European level agreements with car manufacturers to improve the average fuel efficiency of new cars by at least 25% by 2008-2009 backed up by changes to vehicle excise duty and the reform of company car taxation (similar agreements have also been reached with Japanese and Korean manufactuers); and

    —  the 10 Year Plan: £180 billion of investment and public spending on transport over the next ten years to cut congestion and reduce pollution.[92]

41. The UK climate change programme states "By getting the price signals right, polluters are forced to meet the full costs of their action, and given an ongoing incentive to innovate and develop cleaner technologies. Environmental tax measures also raise revenue which can be used to remove other distortions in the economy or to fund specified measures."[93]

42. However, in the short term, technology is unlikely to solve all our transport problems. Despite the advances in technology, fuel economy has not increased markedly since the mid 1980s. It is widely acknowledged that this is because the fuel efficiency improvements have been offset by other factors such as safety features (eg side impact bars which add to the weight of the car), fashions (eg for faster more powerful cars) and increased specifications (eg for air conditioning ).[94]

43. Mr Timms confirmed that the Government was engaged in a clear process of switching the focus of taxation from car usage to ownership as demonstrated by the balance of the Pre-Budget package of duty cuts on ULSP and ULSD, company car taxation, VED changes and duty incentives for alternative fuels.[95]

The move to ULSP

44. In the Pre-Budget Report, the Chancellor announced a further tuppence per litre cut on Ultra-Low Sulphur Petrol (ULSP), widening its differential with standard unleaded petrol. This is conditional upon nation-wide access to the fuel.[96] He also announced a three pence per litre cut in duty on Ultra-Low Sulphur Diesel (ULSD)—currently virtually 100% of the market—to maintain the existing balance between the most commonly available diesel and petrol.

45. The duty cut for ULSP is an attempt to replicate the successful switch over to ULSD. This switch was achieved as a result of the introduction of a fuel duty differential in favour of ULSD over the last three years. The Government provides a detailed case study of this policy and its effects in one of PBR 2000's supporting booklets.[97] Differentials have been used in successive budgets to encourage motorists to switch from leaded to unleaded and now unleaded to ULSP. Mr John Mumford, Head of BP Oil UK said that the roll out of ULSP had been accelerated rapidly by the budget incentives and all of the major oil companies had indicated a willingness and a commitment to get the product to market.[98]

46. The Government expects there to be an overall environmental benefit from the switch to ULSP. Sulphur occurs naturally in fuel and on combustion it forms sulphur dioxide—a local air pollutant which is damaging to health[99] and one which the Government is seeking to reduce in line with the UK Air Quality Strategy. Present, EU standards[100] allow a maximum sulphur content for petrol of 150 parts per million (ppm) and 350 ppm for diesel. These standards will be tightened from 2005 when petrol and diesel must not contain more than 50 ppm throughout the EU. By introducing the duty cuts in PBR 2000, the Government wants to repeat the success of the switch to ULSD and achieve a rapid switch to ULSP well ahead of the EU deadline.

47. Catalytic converters work more effectively and last longer in low sulphur conditions. As a result, it is estimated that ULSP cuts emissions of nitrogen oxides by around 5% as well as reducing other emissions. However, the Government estimates that the shift to ULSP will only result in a 1% drop in NOx emissions, 4% in carbon monoxide and 1% in VOCs (Volatile Organic Compounds).[101] These cuts in emissions are not as great as those achieved with the switch to ULSD because unleaded petrol already produces lower emissions of harmful local air pollutants than diesel.

48. However, the Government hopes that the greatest gains will be derived from direct injection, lean burn technology which requires low sulphur fuels. Gasoline Direct Injection (GDI) engines produce nitrogen oxides and therefore require a catalyser especially designed to reduce these. These catalysers are damaged if the sulphur content is too high. In Germany, the ULSP requirement is 10ppm. BMW told the Committee that vehicle manufacturers wanted to see even lower sulphur fuels in order to make full use of all the potential in future engine technology.[102] The Society of Motor Manufacturers and Traders (SMMT) has urged the Government to take the lead within the EU for pushing for a concerted and early adoption of ultra-low sulphur fuels below 50ppm across Europe.[103] The Committee understands that the EU Environment Commissioner, Margot Wallström, has recently consulted on the need to reduce the sulphur content below 50ppm in order to keep pace with the technological developments of cleaner automotive engines and advanced abatement technology.[104]

49. However, there are some trade-offs to be made. ULSP is more energy intensive to produce overall and there are some estimates that carbon dioxide emissions from refineries will rise by 2-4% as a result of the switch to ULSP.[105] BP confirmed that the reduction in carbon dioxide vehicle emissions to be gained from ULSP, through vehicle technology, does not completely balance out the increases in refinery carbon dioxide emissions in the short term. However, the oil company felt that in the longer term, ULSP would allow more fuel efficient technology to be introduced into the market.[106]

50. ULSP actually costs more for the refineries to produce because they either have to buy more expensive low-sulphur crude oil or put the normal crude oil through an extra production process. There has therefore been some concern that the required differential between normal unleaded petrol and ULSP will not be seen at the pump. BP however, confirmed that it will pass on the tuppence cut in duty whatever the underlying change in oil prices.[107]

51. Stephen Glaister, Professor of Transport and Infrastructure, Imperial College, London has estimated that a total 3p per litre cut on ULSP will mean that as supplies spread, prices at the pump will be 6% lower than if the Chancellor had imposed an inflation-only increase. He estimates that this could lead to 2% more traffic, 4% more fuel consumption and worsening congestion in the long run rather than the fewer journeys by car that the Government is aiming for.[108] As indicated above, an increase in congestion generates increased carbon dioxide emissions.

Diesel and Petrol

52. In the Pre-Budget report the Chancellor announced plans to cut duty on ULSD despite the fact it is already 100%of the market in order to maintain the differential between diesel and the most common petrol (which will be ULSP). Mr Timms told the Committee that the Government did not want to "mess up" the competitive position between petrol and diesel and wanted to keep the current equilibrium which the Treasury felt was about right.[109] Malcolm Fergusson believed that this equal treatment was not necessary in the short-term at all for any environmental reasons as consumers could not decide to switch from petrol to diesel from one day to another. He felt that the Pre-Budget cut was "in truth...a modest pay-off for the truckers, no more or less than that"[110] and created some confusion over the new "green fuels" policy.[111]

53. The RSPB were equally dismissive of this move maintaining that there was "no environmental case for an reduction in the duty on ULSD". As ULSD is already represents virtually 100% of UK diesel use there is no further air quality benefit to be gained from reducing its price. Indeed the evidence suggests that the cut will actually increase its use and could thereby lead to an overall increase in air pollution. The RSPB feels that the Government's wish to maintain the parity between petrol and diesel is "a further clear indication that the Government is unsure of the priority of its objectives on local air quality (for which petrol is a better fuel) or climate change (for which diesel has marked benefits), and wishes not to skew the current market position in favour of either fuel in its period of indecision."[112]

54. The Committee is unconvinced by the Government's justification for further reducing the duty on ULSD ie to maintain the differential between diesel and petrol. The Committee can therefore only conclude that this move was politically motivated to address the concerns of the hauliers. Our impression is strengthened by the Government's recent decision to match any reduction in duty on ULSP that is announced in the Budget with a reduction in duty on unleaded petrol for a temporary period until 14 June 2001.

Vehicle Excise Duty (VED)


  55. In the last Budget, the Chancellor announced that, from March 2001, all vehicles registered for the first time will be placed into one of four Vehicle Excise Duty (VED) bands based on their rate of carbon dioxide emissions. Within each band, there will also be a discount rate for cars using cleaner fuels and technology and a small supplement for diesel cars.[113] Existing cars will continue to be charged a flat rate. A reduced rate is currently available for cars with engines up to 1200cc. PBR 2000 included an extension of the "small car" threshold to 1,500cc.

56. Much of the evidence which the Committee received, including that from the Environment Agency and the WWF, was sceptical about how far the VED changes would encourage the purchase of more fuel-efficient cars.[114] Friends of the Earth went as far as saying that the VED reforms could "claim little environmental justification as the Chancellor implied".[115] Stephen Timms admitted that as VED was only £160 at its highest rate the differentiated rates would not have a huge environmental impact.[116]

57. The Environment Agency welcomed the general principal of graduated VED as a very positive step but was concerned that the extension of the rebate on VED to larger engine sizes was a retrograde step. The Agency would prefer to see vehicle taxation more closely related to emissions than engine size.[117] The RSPB were also disappointed at the widening of the cheapest VED band and felt that the Government should have created a more graduated structure making it cheaper it run cars below 1200cc and therefore incentivise drivers to move towards less-polluting vehicles.[118] WWF and Friends of the Earth suggested a corresponding increase in the VED for larger cars.[119]


  58. The PBR 2000 also proposed changes to the arrangements for VED for lorries. The Chancellor offered rebates of up to 50% of the 12-month license fee prior to the introduction of a new structure of VED rates in the 2001 Budget. The Treasury estimates that this interim rebate scheme will cost £300 million.[120] The Chancellor also proposed a ring fenced fund of £100 million to offer further incentives for allowances for scrapping older, more polluting lorries or encouraging cleaner lorries and technology.

59. In Budget '98 the Government announced the reform of the existing VED system for lorries so that the tax rate better reflected the environment and track costs associated with different lorries. To inform this review, the DETR commissioned a consortium consisting of: National Economic Research Associates (NERA), AEA Technology and the Transport Research Laboratory (TRL) to produce a report on lorry environment and track costs (the NERA report). This was published in April 2000 and concluded that the total external costs of an individual lorry (HGV) could exceed £28,000 per year.[121]

60. The Treasury aims to have fewer and simpler classes differentiated according to the environmental costs caused by different types of lorries. This is intended to encourage the use of cleaner lorries which damage the road less.[122] The Committee was pleased to hear Mr Timms confirm that NERA's research would be reflected in the revised scheme for lorry vehicle excise duty.[123]

61. However, it is difficult to see how Mr Timms confirmation fits with the new system proposed. Although the new bandings may better reflect the relative environment and track costs of different lorries, as identified by the NERA report, the Government is still proposing to cut the VED rates. Only last year the House of Commons Environment, Transport and Regional Affairs Committee concluded that these rates were "unrealistically low" and had not reflected the true costs imposed by the road haulage industry on society.[124]

62. The Committee concludes that the Government's approach to Vehicle Excise Duty needs further work. The proposals for VED for lorries will better gear the tax to the relative environmental costs of different lorries. However, the total environmental impact of the tax will be greatly reduced if, as announced, it is cut by half overall. The economic rationale for this seems obscure in the light of the Environment, Transport and Regional Affairs Committee report and the DTI's evidence to the Trade and Industry Committee.[125] In environmental terms, the move flies in the face of the NERA estimates and, therefore, the Polluter Pays Principle.

Company Car Taxation

63. In Budget 2000 the Chancellor announced that from April 2002 tax liability for company cars would be calculated on a car's emissions of carbon dioxide. At present, a driver's tax liability is calculated on a car's list price with increasingly large discounts for higher business mileages. Under the new scheme, it is proposed that tax will be based on a sliding scale of 1% of list price for each five grammes of carbon dioxide per kilometre it emits over or under a first-year benchmark of 165g/km. At the benchmark itself, tax is based on 15% of the list price. This benchmark will be cut progressively to 145g/km over two years. The tax on diesels will start at 18% of list price to reflect their greater polluting impact in terms of local air quality. Conversely there are greater discounts for electric, gas and hybrid cars.

64. The Pre-Budget report sets out proposed reforms to the present system which allows employers to pay employees to use their private cars on business without the employee incurring income tax or National Insurance Contribution (NIC) liability. At present, payments are authorised depending on engine size (higher rates for larger cars). As an early incentive to use cleaner cars for business trips, Pre-Budget 2000 offers drivers of small cars an increase in the current two lower bands of authorised mileage rates to flat rates of 40p for the first 4,000 miles and 25p for further miles from April 2001. The rates for the two higher bands will be frozen. For the second stage of reform, the Government has been consulting with interested parties on the introduction of the a new statutory system of mileage rates for April 2002. This offers greater incentives: i) a single tax and NICs free rate of 40p per mile for the first 10,000 business miles per year for all sizes of car ii) a single lower rate of 25p per mile for any additional business miles above the first 10,000.[126]

65. Transport 2000 had concerns in relation to the authorised mileage rates. They felt that the 40p rate was far in excess of the real cost of running a car and that the 10,000 mile threshold was too high. For example, they have estimated that a return journey between London and Manchester of 400 miles would generate a tax free payment of £160 against a running cost (estimated on AA figures) of £74 and a petrol cost of £42 (for a 1400cc car). This would therefore create an incentive to use the car rather than the train and the additional business mileage would offset the air quality benefits of any reduction in the size of cars.[127]

66. Most witnesses agreed that the changes in company car taxation could have a considerable environmental impact and reduce the perverse incentives of the current system towards unnecessary motoring in order to achieve the necessary mileage figures for tax breaks.[128] Business cars make up around half of all new car sales, and over time, a significant proportion of the second-hand car market.[129]

67. The Government's Cleaner Vehicles Task Force acknowledged that financial incentives were a "powerful influence on consumer choice" but recommended that the impacts of such incentives must be kept under review.[130] This view was echoed by Transport 2000 in particular who felt that it was important that Inland Revenue published statistics on authorised mileage so that the environmental impact could be kept under review.[131] They told the Committee that the data for company cars—their numbers and mileage—was in the public domain but not that of the business-use of private cars.

68. The Committee welcomes the changes to company car taxation and the arrangements for the business use of private cars which will reduce the incentive for unnecessary motoring. The Committee recommends that the impacts of these new incentives (social, environmental and economic) are regularly monitored and reviewed to assess how far they are changing behaviour in line with the Government's policy objectives.

90  Q6 Back

91  Q20 Back

92  Climate Change: The UK Programme, DETR, November 2000 p8  Back

93  Ibid, p27, para 6 Back

94  See for example, Ev p99, para 6 Back

95  Q20 Back

96  The Financial Secretary confirmed that "nationwide access" would have been achieved when everybody, wherever they are in the country, will be within within reasonable reach of ultra low sulphur petrol (Q123). BP confirmed that this was also their understanding (Q253) Back

97  Using the Tax System to Encourage Cleaner Fuels: The Experience of Ultra-Low Sulphur Diesel, HM Customs and Excise, November 2000 Back

98  Q252 Back

99  Sulphur dioxide can cause constriction of the airways of the nose, throat and lungs Back

100  Directive 98/70 Back

101  Using the Tax System to Encourage Cleaner Fuels: The Experience of Ultra-Low Sulphur Diesel, HM Customs and Excise, November 2000, para 5.2 and "Brown spins the Government out of a fuel crisis", The ENDS Report, November 2000 Back

102  Q264 Back

103  Ev p99, para 11 Back

104  Ev p99, para 10 Back

105  Brown spins the Government out of a fuel crisis, The ENDS Report, November 2000 Back

106  Q262 Back

107  Q256 Back

108  Stephen Glaister, Why trains are no longer just the ticket, Observer, 26 November 2000 Back

109  Q46 Back

110  Q261 Back

111  Ev p50, para 11 Back

112  Ev p85, para 1 Back

113  HM Treasury/DETR Budget press notice HMT/DETR1, Budget sets Britain on road to better transport and environment, 21 March 2000 Back

114  Ev p92, p77, paras 11-12 Back

115   Ev p97, para 21 Back

116  Q114 Back

117  Ev p77, para 10 Back

118  Ev p86 para 2 Back

119  Ev p92, p97 para 22 Back

120  Building long-term prosperity for all; Pre-Budget Report, HM Treasury, November 2000, p130, para 6.67 Back

121  NERA Report on Lorry Track and Environmental Costs, 14 August 2000 as published on DETR website at Back

122  Q105 Back

123  Q104 Back

124  HC 296 (1999-2000) Fifteenth Report of the Environment, Transport and Regional Affairs Committee, The Road Haulage Industry, para 109 Back

125  See footnote 6 Back

126  Building Long-Term Prosperity For All: Pre-Budget Report, HM Treasury, November 2000, paras 6.61-6.62 Back

127  Ev p37, see also Q219 Back

128  For example see Q218, Ev p75, para 5.1, p 92  Back

129  The Way Forward, the final report of the Cleaner Vehicles Task Force, June 2000, para 25, 

130  The Way Forward, the final report of the Cleaner Vehicles Task Force, June 2000 

131  Q219 Back

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