House of Commons - Environmental Audit

Select Committee on Environmental Audit Second Report

PRE-BUDGET 2000: FUELLING THE DEBATE

Other issues arising from the Pre-Budget Report 2000

105. We have concentrated on fuel duty and the environment but the Pre-Budget Report 2000 and our evidence obviously contain information on a number of issues on which we have focused in the past. We set out below our comments on a number of these.

Government response to the EAC report on Budget 2000

106. The Government's observations on our report on the 2000 Budget[185] are appended to this Report.[186] We note the statement therein that "contributions from the Environmental Audit Committee have played an invaluable role in taking forward the Government's environmental tax agenda, and will continue to do so". In order that this invaluable contribution better informs debate on the floor of the House, on and after Budget day we recommend that the Chancellor allows reference to this Report—a 'tag'—to appear on the Order Paper on Budget Day. This would mark a welcome return to previous Government practice for the Budget debates of 1998 and 1999 when equivalent tags were accepted.[187]

Pesticides

Background

107. The Committee found in favour of the case for a pesticides tax in its Fourth Report of 1999-2000 and expressed regret when the Government shelved the idea of a tax before the 2000 Budget.[188] We have since found, while inquiring into water prices and the environment, more evidence in favour of a pesticides tax. In evidence to this current inquiry the RSPB expressed sympathy with the current plight of farming in Britain but said that the Government's reluctance to proceed with a tax was not in line with other of its messages—that environmental issues will be more central to agricultural production in future and promotion of the 'polluter pays' principle.[189]

108. Since the last budget, the Government has been consulting on various proposals put forward by the Crop Protection Association (formerly the British Agrochemicals Association) for a voluntary package of measures to reduce the environmental impacts of pesticide use. This is a similar process to that undergone by Government and the Quarry Products Association with regard to the extraction of aggregates in advance of Budget 2000 (see our Fourth Report of 1999-2000 and below).

Progress

109. The package of measures proposed so far by the Crop Protection Association has been criticised in our evidence. Friends of the Earth (FoE) described the marked weakness of the proposals as the inevitable consequence of asking an industry to come up with measures to reduce its market.[190] The RSPB claims that the CPA's efforts are "widely considered to be wholly inadequate to address the environmental impacts of pesticides".[191] The Government also thinks that the CPA can do better and is in discussions with the Association in the run up to the 2001 Budget. However, it seems unlikely that these discussions could fail so quickly and irreversibly, and so near a likely general election, so as to provoke announcement of a pesticides tax in a 2001 budget. The latest developments in the agricultural sector strengthen this view.

110. The CPA estimates the costs to farmers, growers and landowners of its five-year programme to be about £11.5m per year and the costs to the crop protection industry to be about £10m per year over the same period. The revised proposals include new elements:

— a commitment to actively support farmland biodiversity and UK Biodiversity Action Plans with resources;

— reducing surface water contamination in partnership with water companies and environmental agencies;

— five new 'indicators'[192]

— voluntary modular crop protection management plans;

— extending a required professional qualification for those who advise on pesticide use;

— improving information and guidance for farmers, landowners and agronomists on increasing biodiversity in arable areas; and

— a code of practice for insecticide use in crop production

There are also a number of developments to the original proposals which include:

— exploration of closed-transfer systems for pesticides;

— a commitment to act on the findings of a review of the uptake of integrated farm management;

— commitment of resources and funding to two specific projects (under the Government's LINK initiative) on weed management and optimising application practice;

— training and website on the incorporation of environmental information on pesticides into crop protection management plans;

— crop protection management plans to incorporate measures to protect water supplies from contamination and new indicators to measure water quality standards; further protection of water supplies from contamination; and

— more training for agronomists in environmental, biodiversity and conservation issues and the availability of resources on such matters extended to others beyond the CPA.[193]

The DETR website contains an analysis of the responses to the consultation on the CPA's revised proposals.[194] Typical criticisms included:

— there was no commitment to long term change and proposals were couched in very general terms;

— Government's objectives (in relation to substitution by less harmful pesticides, adoption of alternative techniques, or provision of incentives for reducing impacts) were unaddressed;

— the approach would not secure reductions in use;

— the package did not address the withdrawal of pesticides with poor health and environmental profiles, developing safer products, committing to greater uptake of Integrated Crop Management (ICM), developing alternatives to sulphuric acid;

— insufficient emphasis on role of ICM in genuine usage reductions

— clarification needed over targets, monitoring mechanisms and enforcement;

— failure to offer support for improved application technology and to bring chemicals and application technology together as suggested by the Pesticides Forum;

— nothing about need for R&D on more environmentally benign compounds and those which can be applied at reduced rates; and

— package does not match costs of proposals to cost to environment.

Overall the CPA was criticised for offering nothing new except training and advice. We would expect to see a "more substantial package" of measures set out by the CPA and Government within the Budget 2001 documentation.

The Aggregates Levy

111. We have previously recommended a stick and carrot tax package for the quarrying sector along the lines of the Climate Change Levy.[195] In Budget 2000, the Government rejected the 'agreement-and-rebate' element of our proposal as well as the voluntary measures put forward by the Quarry Products Association (QPA).

112. Instead, from April 2002, there will be an Aggregates Levy to address the environmental costs of aggregates extraction primarily by encouraging the use of recycled materials. The revenues will be recycled through a 0.1 percentage point cut in employers' National Insurance Contributions and a £35 million "Sustainability Fund" aimed at the local impacts of quarries.

113. The RSPB said it was "delighted" with the Government's swift action on establishing the aims of the Fund and with the guaranteed allocation of resources for its first year.[196] We received a memorandum from a body called the British Aggregates Association which described itself as entirely separate from the QPA and representing small and medium independent quarry companies. This evidence details a number of criticisms of the proposed Aggregates Levy and is set out in the volume of evidence that accompanies this Report.[197]

114. We would remind the Government of the need to get the rest of its house in order regarding the extraction of aggregates if the Levy and Fund are to have the maximum effect. Planning guidance and requirements as well as the relevant targets and definitions for secondary materials should be reviewed. In addition the Government, as a major purchaser of aggregates, has to look at its own procurement to ensure that it leads the way in making use of secondary materials.[198]

The Climate Change Levy (CCL)

Background

115. The Climate Change Levy (CCL)—a tax on the use of energy by industry and business announced in the 1999 Budget—is set for introduction in April 2001. The main elements of the Levy are:

— a tax on the use of energy by business and industry (renewable energy and good quality CHP are exempt from the tax);

— 80% rebates for certain sectors linked to the achievement of energy efficiency or carbon dioxide reduction targets; and

— revenue neutrality:

a cut in employers' National Insurance Contributions (NICs)
enhanced capital allowances available for investments in energy efficiency
resources of £50 million per year to promote energy efficiency, low carbon technology and new sources of renewable energy

Progress—February 2001

116. The Government reply to the EAC's Budget 2000 report identified 46 sectors with whom CCL agreements were being negotiated. Fifteen such agreements (32%) had been signed by 14 February 2001 entitling businesses in those sectors to an 80% reduction in the Levy if targets are met. The relevant sectors are: cement, brewing; maltsters; motor manufacturers; steel; cathode ray tubes; mineral wool; semiconductors; metallurgical slag grinders; composite wood-based board; non ferrous metals; lime; printing; rendering; and animal feeds.[199]

117. The total carbon saving represented by these agreements is estimated by DETR to be 600,000 tonnes of carbon per annuum by 2010.[200] This is 24% of the total estimated carbon savings to come from the CCL negotiated agreements by 2010 as set out in the PBR 2000.[201] Most of the 15 available agreements refer to efficiency targets (ie reductions in kilowatt hours per unit of production). For example the targets within the cement and motor vehicle agreements are as follows:

Target period	Sector target (relative: kwh per kg cement)
2002 (1 January-31 December 2002)	1.457
2010	1.249
Improvement (2002-2010)	14.3%

Target period	Sector target (relative: kwh per vehicle)
2002 (1 October 2001-30 September 2002)	3,036
2010	2,792
Improvement (2002-2010)	8%

Efficiency targets do act to decouple further CO₂ emissions from economic growth in the UK. However, it makes achievement of the UK's targets for absolute reductions in greenhouse gases, and specifically CO₂, heavily dependent on the levels of sectoral production and the UK energy mix up to 2010.

118. Some sectors, notably steel, have opted for an absolute target. The target within the steel agreement is as follows:

Target period	Sector target (absolute: petajoules)
2002 (1 January-31 December 2002)	388.3
2010	360.8
Improvement (2002-2010)	7.1%

One important consideration in evaluating the value of these agreements will be the extent to which they represent additional savings to the 'business as usual' path within each sector.

119. The other outstanding issue of concern is whether the Climate Change Levy (CCL) package will receive clearance under European state aids rules. We look to the timely approval of the UK's application as the PBR predicted in November last year.

Resources

120. We welcome the money announced in the 2000 Spending Review for the development of an Emissions Trading Scheme which is aimed at encouraging the adoption of absolute emission reductions targets by participating companies. We note the expectation that the first group of firms may sign up in 2001 and begin trading in 2002.

121. We remain unconvinced by claims repeated in the 2000 PBR that enhanced capital allowances represent a real and enduring cost to the Exchequer of the gross amounts set out—£100m in the first year and £140m in the second.[202] We remain of the opinion that, unless take-up rises exponentially and continuously (like a pyramid-selling scheme), after the first few years the initiative's real cost will rapidly decrease as companies start to pay their deferred liabilities. The DETR seems to agree: "there is no change in the tax paid overall, only in the timing of the relief".[203]

122. We were somewhat bemused by the announcement of further "new" funds for energy efficiency and renewables in the PBR (paragraph 6.28) described as coming out of Spending Review 2000. £50 million per year identified in the PBR, has been part of Government's CCL package since the first consultation in March 1999 (reflecting a the principle set out in Lord Marshall's earlier report of 1998). In any case these resources form part of the Levy's revenue-neutrality whereby CCL revenue is recycled to business and industry through various channels—principally the cut in employers' National Insurance Contributions (NICs).

VAT on energy saving materials

Background

123. The Committee was delighted when, not before time, the Government announced last budget that VAT on the installation of certain energy saving materials would be reduced to 5%—achieving parity between the rate of VAT on energy conservation and energy consumption. This followed the initial application of a reduced rate to the installation of energy efficiency measures under certain Government-funded schemes. We noted, in our last report, the rationale for targeting the wider reduced rate was limited to installing materials whose primary purpose was energy-saving. Previously we recommended that the list be extended to include products with "significant energy-saving features"—in effect the introduction of a tax differential favouring installation of higher energy efficient products. In responding to the Committee the Government simply repeated the criteria we had already noted, citing prudence as the watchword.[204] We note that the 'primary purpose' limitation does not apply to installations under Government-funded schemes—principally the Home Energy Efficiency Scheme (HEES). All energy saving measures installed under HEES attract VAT at a reduced rate.[205]

Progress

124. The Government was certainly prudent in introducing a reduced rate in the first place, dithering from July 1997 until March 2000. However, the principle has now been established, without doing violence to the 6th EC VAT Directive (Annex H). We feel that the Government should seek to maximise the economic, social and environmental benefits of enabling more energy efficient installations, in more homes, across a broader spectrum of materials and equipment. An appraisal of relevant synergies and trade-offs in extending the reduced VAT rate to more energy-efficient products should be undertaken and published. Such an appraisal could include an assessment of the extent to which the Government's two previous reforms on VAT and energy efficiency have delivered the expected benefits.[206]

125. The Government's response to us on VAT and energy efficiency is not persuasive nor even credible. Having accepted the principle of a reduced rate of VAT on the installation of energy saving materials, the Government should now extend the rather limited list of eligible technologies to include materials and equipment with significant energy-saving features—as is the case with such installations under its own schemes.

Urban regeneration

Background

126. The Government is committed to a programme of urban regeneration to make towns and cities into places where people want to live, work and spend their leisure time as well as being attractive to business. The Government also has a target of achieving a rate of 60 per cent of new housing built on previously developed 'brownfield' land. The Government's Urban Task Force under the chairmanship of Lord Rogers of Riverside reported in 1999. On the issue of bringing derelict and underused urban land back into use the Task Force recommended a range of fiscal and other measures.[207] The PBR reported that the Government "whole-heartedly supports the vision set out by the Urban Task Force".

127. The Urban White Paper responded to Lord Roger's recommendations for fiscal measures with proposals that were set out in detail in the PBR 2000.

128. The PBR announced a number of initiatives for implementation in Budget 2001 aimed at encouraging more productive use of brownfield land and empty properties.

An exemption from stamp duty for all property transactions in Britains most disadvantaged communities (costing £100 million per year by 2002-03)

The Financial Secretary confirmed that the principal 'regeneration gain' was expected to be the attraction of business into deprived areas[208] (identified on a ward by ward basis) rather than through the residential market.[209] We suggested, in that case, that the exemption be limited to commercial property transactions. Mr Timms regarded the inherent need to distinguish between residential and commercial transactions as an unwelcome complication for the stamp duty system which "we could do without".[210]

An accelerated tax credit for costs incurred in cleaning up contaminated land (costing £30 million in 2001-02 and £55 million in 2002-03)

— Reduced-rate VAT for converting residential properties into a different number of dwellings[211]

The Financial Secretary confirmed that the reduced rate applied to the conversion of flats into a single dwelling as much as to the conversion of family houses into flats.

Zero-rated VAT for the sale of renovated houses empty for over 10 years

The Financial Secretary confirmed that previously sales of renovated properties continuously vacant since 1973 were eligible for a zero-rate of VAT. This definition is to be adjusted to include properties now vacant for 'ten years or more'. We remain curious as to the provenance of the data for the properties concerned as the Empty Homes Agency and the DETR are apparently limited to annual returns.[212]

Tax relief for the costs of converting space over commercial properties into flats for letting and a reduced rate of VAT for the repair and renovation of listed buildings which are used as places of worship.

213

129. We pressed the Financial Secretary on why the Government had not adopted, what many regard as the main recommendation in Lord Rogers' report, namely the harmonisation of the rate of VAT on new build (for example on a greenfield site) and that applicable to residential conversion—a step recommended previously by this Committee and supported by a range of NGOs and other commentators.[214] Mr Timms told us that the Government had picked up the spirit of the recommendations made by the Task Force even if it had not accepted all 105 suggestions.[215]

130. We acknowledge that the package of measures put forward by the Government, especially the fiscal incentive in the form of the Stamp Duty exemption, reflects the spirit of Lord Rogers' report on urban regeneration. However, we are disappointed that the Government's programme is a relatively limited one when taken as a whole. In particular we regret the decision not to accept Lord Rogers' recommendation for the harmonisation of VAT on new build and residential conversions and we recommend that the Government looks at this again.

Strategy and environmental appraisal

Background

131. The Committee has welcomed the inclusion within budget documentation of information on the Government's sustainable development objectives and links between economic, social and environmental policies. We have also welcomed the development of the environment chapter and Tables 6.1 and 6.2 which set out information on the Government's environmental objectives and the impact of certain tax measures. However, as many of our witnesses point out, these developments have their limitations.

Strategy

132. We have criticised the apparent lack of a strategic approach to environmental tax reform in the budget on a number of occasions. In PBR 2000 the Treasury has organised its green tax measures under a number of headings: climate change and air quality; regeneration; and protecting the countryside. It also sets out its approach for achieving its stated aim of ensuring that 'economic growth takes place in a way that protects and where possible enhances the environment'. This approach is set out as a number of steps: identifying problems and risks; setting objectives and targets; appraisal, selection, consultation and implementation of the most appropriate set of policy instruments; and evaluation of the success of policies with modification where necessary and applying the lessons learned from one policy area to others.[216] The Environment Agency commented that while it welcomed the Treasury's acknowledgement of the need for a clear environmental strategy and its key objectives "it is less clear how the Treasury has developed these objectives, and how it intends to develop and pursue them".[217] All in all the Treasury's stated approach sound like admirable terms of reference for a standing Green Tax Commission which could approach the greening of the tax system systematically. However, this is a longstanding recommendation of the Committee for which the Government seems to have little enthusiasm.[218]

133. We have some sympathy for the view of Biffa and The Green Alliance that the PBR 2000 demonstrates little understanding of the potential to integrate environmental concerns into the Treasury's mainstream concerns for example on rising to the productivity challenge where objectives for increased efficiency in the use of natural resources could be addressed.[219] Biffa wrote that "the environment appears as something that is not part of [Treasury's] perceived financial 'planet'—it seems to sit like the moon orbiting them on the outside—a moon which was previously invisible to the naked eye but whose presence somehow has to be acknowledged on the basis of its very obviousness".[220] The Treasury's stated strategy for the environment and economic instruments should be placed in the context of the Government's objectives and key actions and commitments as set out in the Sustainable Development Strategy of May 1999. Without this it appears as little more than the rationalisation of a piecemeal approach without any suggestion that the tax and spending system themselves are being 'explored' for opportunities to create good green incentives, shift the burden of taxation onto 'bads' or reduce unsustainable subsidies.

Appraisal

134. The IEEP comments that Table 6.2 is accompanied by very little discussion, or presentation of the underlying assumptions or methodologies used in reaching the estimates set out in marked contrast to the economic aspects of the budget.[221] We would agree with this while pointing out that for just over half of the measures cited no estimates are in fact given. As we mention above evidence from The Green Alliance "hoped" that the lack of quantitative assessments given of the environmental implications of proposals did not reflect the manner in which the policies were developed.[222] Reference is made in the PBR (at para 6.101) to supporting analysis but in very general terms.[223]

135. Information is presented in quite a confusing manner in Table 6.2. As we have noted above, the policy change actually announced in this PBR on ultra low sulphur diesel for example, is in fact a significant cut in duty. The Table fails to set out the likely effect of this reduced duty (ie a rise in consumption) but seems to pitch its analysis at the overall reduction in NOx and particulates resulting from the existing differential between ULSD and standard diesel (a done deal surely, now that ULSD has captured 100 per cent of the diesel market).

136. A similar approach is again employed with regard to road fuel duty overall despite previous criticism from this Committee.[224] The policy announced in this PBR is a freeze on petrol duties in cash terms resulting in a 1.5p cut per litre. As in 1999, when decisions on fuel duty were put on a budget-by-budget basis, the analysis in the Table sets out the effect of the fuel duty escalator between 1996 and 1999 rather than the impact of what the Financial Secretary eventually agreed was a substantial change in policy[225] (leading to expected carbon dioxide emission reductions from the FDE up to 2010 being halved). PBR 2000 is not alone in downplaying the impact of shelving the FDE. We were disappointed that the Government's annual report on the Sustainable Development Strategy produced in January 2001 did not discuss, or even report, the change of policy despite the fact that the original strategy referred to the FDE, increased to 6%, as a key measure in tackling climate change and air quality.[226]

137. The Environment Agency and the RSPB both pointed to the focus of Table 6.2 on specifically environmental measures.[227] Treasury has stated consistently that all budget measures are appraised for their environmental impacts but we are intrigued by the lack of non-environmental measures in the Table since the first example in 1998. In PBR 2000, the only such entry is for the reduced rate of VAT on domestic fuel and power (it is also the only entry assessed to have a negative impact). Curiously this policy change was introduced in 1997 and its inclusion, in this part of a budget or pre-budget report for the first time, was described by the RSPB as 'rather spurious'.[228]

138. When we discussed the 2000 reduction in air passenger duty with the Financial Secretary in 1999 he told us "we have aimed to provide quantified estimates where it is possible to do so...we do not think that the change in air passenger duty is going to make a very significant quantifiable difference to feature in the figures on this table...everything, where we can quantify the impact sensibly, is in the table—so, by default, the measures that are not, we do not think we can sensibly put figures on".[229] We would again point to the nine measures that do appear in the table but which have no quantified impact, sensible or otherwise. The Treasury's environmental appraisal of its budget measures appears to be little more than a summary list of the impacts of its environmental measures—even at that there are some significant presentational flaws.

139. The Treasury should improve the presentation of its environmental appraisals as set out below:

setting out a clear protocol for when and how decisions are included and assessed to avoid accusations of data manipulation;

— drawing clear distinctions between the overall impact of policy measures and the effects of changes made to the detail (ie where benefits remain but have been reduced);

— setting out full and clear references to supporting data and analyses; and

— distinguishing between measures in terms of the stage of policy development that they have reached (consultation, announcement or implementation).

140. As we have previously noted, the Government included in its observations on our Report on the 1999 Budget,[230] a commitment "to publish an ex post evaluation of its existing environmental tax measures on an annual basis, to complement the appraisal data for proposed new or amended measures which are already included in the Budget".[231] We have seen no evidence of any action on this commitment and we recommend that the Treasury's list of green budget measures start to include information on what has been achieved (outturn against estimate) for those measures that have been implemented. At the very least reference should be made to where such data is published.

141. The Treasury should demonstrate, perhaps initially as a one-off exercise for the next Pre-Budget Report, how it appraised the environmental implications of all its proposals. This would increase the confidence of outside observers, including Parliament, in this process.

185 Sixth Report, 1999-2000, HC 404 Back

186 See Appendix I Back

187 See House of Commons Order Paper, 9 March 1999 and 17 March 1998 and Early Day Motion 552, Session 1999-2000 Back

188 Fourth Report, 1999-2000, HC 76, para 29 Back

189 RSPB highlight that the costs of removing pesticides from water fall on water consumers rather than on pesticides users. See ev p86 Back

190 Ev p98 Back

191 Ev p86 Back

192 These are:
- additional water treatment arising from a need to meet EU standards for pesticide residues in drinking water

- area of cereal field margins under environmental management

- repetition of the proposed survey of current practices and equipment used in applying pesticides (CPA's first proposal in its original bid) after three years

- the proportion of agronomists on a professional register requiring continuous professional development

- the proportion of active spray operators who are members of a proposed new professional development scheme Back