APPENDIX I
GOVERNMENT RESPONSE TO THE SIXTH REPORT
FROM THE ENVIRONMENTAL AUDIT COMMITTEE, 1999-2000, HC 404, BUDGET
2000 AND THE ENVIRONMENT
Performance
(a) In terms of environmental taxation, we
fully recognise the positive aspects of what the Government has
achieved and the commitments it has made.
The Government welcomes the Committee's sixth report,
which recognises the positive aspects of what the Government's
environmental tax reform programme has achieved and the commitments
that the Government has made. 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.
Sustainable development remains a priority for the
Government. We will continue to advance it though both our own
long term goals such as our targets for reducing greenhouse
gas emissions and increasing waste recycling and publishing
regular updates on progress towards Sustainable Development, including
on the Government's headline indicators
(b) However, we still believe that the Government
must set out a plan for developing, implementing and evaluating
its programme of environmental tax reform. Work in progress does
not appear yet to reflect all the areas of environmental concern
set out in the Government's Sustainable Development Strategy.
Nor does it amount to a strategic reform of the tax system to
increase incentives to reduce environmental damage.
The Government's sustainable development strategy
sets out our intention to explore the scope for using economic
instruments, such as taxes and charges, to deliver more sustainable
development. Such measures can promote change, innovation and
efficiency and higher environmental standards.
Within the Sustainable Development Strategy, the
Government believes that the tax system can be used to send clear
signals about the economic activities the Government believes
should be encouraged or discouraged. The Government's position
was set out in the Statement of Intent 1997 on environmental taxation.
The Government expanded on the principles contained in the Statement
of Intent in the Pre Budget Report 1999.
The Statement of Intent committed the Government
to explore the scope for using the tax system, alongside other
policy instruments, to deliver environmental objectives,. As a
result, the Government has developed and implemented a number
of environmental tax reforms which are intended to tackle climate
change, improve air quality, regenerate the UK's cities and protect
the countryside. The Government continues to monitor progress
towards meeting these goals, and is continuing to push environmental
reforms forward. The Pre Budget Report will set out an assessment
of progress in developing the environmental tax reform agenda.
The Government is also committed to a full evaluation
and appraisal of the environmental effects of the policies it
introduces. These effects are summarised in the appraisals tables
contained in the PreBudget and Budget Reports. The Government
welcomes the interest that the Committee has shown in these tables
in recent years and has adapted the tables in the light of these
and other suggestions. The Government looks forward to receiving
further suggestions for improvement.
(c) The Government must accept that increases
in the proportion of revenue coming from environmental taxes is
the only indicator of progress in relation to its own stated aim
of "shifting the burden of tax from 'goods' to 'bads' ".
If the Financial Secretary is suggesting that shifting the burden
from 'goods' to 'bads' is not now an aim of the Government, or
a meaningful goal at all, then we require a thorough explanation
and a new Statement of Intent on Environmental Taxation.
The Government stands by the principles behind the
Statement of Intent on environmental taxation that over
time, it wishes to shift the burden of taxation away from "goods"
such as employment, savings and investment, and towards "bads"
such as environmental pollution and the wasteful use of natural
resources. The Government's commitment to this principle has been
clearly demonstrated in practice with revenues from both the climate
change levy and the aggregates levy being used to reduce the burden
of employers' national insurance by a total of 0.4 percentage
points by April 2002.
However, there concerns about using the proportion
of revenue coming from environmental taxes as the only indicator
of progress. The revenues from an environmental tax that successfully
reduces environmentally damaging behaviour may fall over time.
The Government would regard this as a successful outcome, even
though the share of tax revenues from environmental taxes might
fall.
Furthermore, the Government's strategy on environmental
tax reform is far broader than simply introducing new environmental
taxes.. Fuel duty differentials, for example, have been a highly
effective means of encouraging the take up of less polluting fuels
such as Ultra Low Sulphur Diesel yet would not be shown up by
this measure. And reforms to the major sources of Government revenue
such as corporation tax, income tax and VAT would not be classed
as environmental taxes. But the introduction of accelerated capital
allowances for energy efficient technologies, reform of the income
tax treatment of company cars available for private use and the
extension of the reduced rate of VAT for the installation of energy
saving materials in the home, clearly shift the burden of tax
from goods to bads and are all expected to have a significant
positive environmental impact. They do not, however, show up in
a measure of environmental tax revenues.
Strategy
(d) The Government needs to do more to set
out a strategic approach to budgetary and fiscal environmental
policies and the interaction of these with other initiatives.
The Government is committed to putting economic,
social and environmental concerns alongside each other at the
heart of decision making. The environment chapters in the Pre
Budget Report 1999 and in Budget 2000 clearly set out how the
Government's environmental objectives can be achieved and the
range of policy instruments that can be used. These includes regulation,
public spending, information campaigns, voluntary agreements,
and economic instruments such as taxes and charging. The use of
these measures is assessed on a casebycase basis,
taking into account the wider economic and social consequences.
In many cases, a mixed package of policies will be needed, as
in the case of the Government's strategy to the combat climate
change, which includes the energy efficiency fund, the climate
change levy, and the Pollution Prevention Control regulations.
Economic instruments such as taxes, charges and trading
can offer the scope for tackling environmental costs in the most
efficient way. By making use of the price mechanism, economic
instruments allow those involved in environmentallydamaging
activities to respond according to their own circumstances. Those
facing the lowest costs of pollution abatement are given an incentive
to make larger pollution reductions. In this way, economic instruments
integrate effective protection of the environment and prudent
use of natural resources into the heart of economic decision making.
Although Budget documentation will necessarily focus
on fiscal measures, further details of how environmental tax reforms
fit within the Government's wider strategy for achieving its environmental
objectives are set out in dedicated publications. Since Budget
2000, the Government has published the Waste Strategy, and the
ten year plan for transport. Forthcoming publications, such as
the Urban White Paper, the Rural White Paper and the UK's Climate
Change Programme will set out the Government's strategic approach
in these key areas.
We will continue to develop our environmental tax
agenda which is already delivering real environmental benefits
in ways which protect the competitiveness of UK firms and are
socially
equitable. The Government will take the Committee's
views into account as we prepare for the Pre Budget Report.
(e) It is essential that the Government sets
out clearly how it intends to pursue its programme of environmental
tax reform. Major areas where such reform must play a more effective
role, for example, include:
new development, where there are significant
perverse fiscal incentives in favour of greenfield rather than
brownfield sites;
The forthcoming Urban White Paper will set out the
Government's strategy for generating an urban renaissance. This
will demonstrate how a mix of policy instruments including
fiscal reforms can contribute towards regenerating our
urban areas and recycling previously developed land. The Urban
White Paper will include the Government's formal response to the
recommendations made by Lord Rogers' Urban Task Force in their
report, "Towards an Urban Renaissance".
The Government announced new planning policy guidance
for housing (PPG3) in March, which addressed several of the Urban
Task Force's recommendations. The new PPG3 promotes greater efficiency
in the use of land, gives preference to development of recycled
land and building before development of greenfield sites, and
encourages higher quality housing development. The recent Housing
Green Paper "Quality and Choice: A decent home for all"
sets out our proposals for meeting the further challenges of delivering
greater quality and choice across the housing market.
In Budget 2000, the Government announced it was attracted
to the idea of offering stamp duty relief to encourage developments
on brownfield land. Since then, the Inland Revenue has consulted
with a range of interested parties on how this measure might be
targeted to help meet the Government's objectives and how it might
work in practice. Progress will be reported in the Pre Budget
Report.
waste, where huge changes in attitudes
and behaviour are needed to meet targets in EU directives;
The Government's Waste Strategy 2000, published earlier
this year, recognises that a huge step change is needed in how
we manage waste. This is needed to ensure that we manage waste
sustainably, and ensure a better quality of life for future generations
as well as to meet the targets in EU waste directives.
To achieve this goal, we need to reduce how much
waste we produce, increase the recycling and recovery of waste,
and curb landfill rates. The Strategy sets out a package of measures
designed to deliver these changes. Economic instruments are a
part of this package, and have a useful role to play alongside
other measures such as the new Waste and Resources Action Programme,
best practice programmes and regulatory action. For instance,
the Strategy includes the use of economic instruments such as
tradable permits for local authorities to limit the amount of
biodegradable municipal waste being landfilled. It also includes
the use of the Aggregates Levy, Packaging Recovery Notes and other
producer responsibility initiatives to promote the minimisation
and recycling of particular waste streams. The Waste Strategy
also committed the Government to using the considerable resources
flowing through the Landfill Tax Credit Scheme to deliver an increase
in recycling rates, particularly of household waste.
energy, where notwithstanding the Financial
Secretary's comments the evidence suggests that current and planned
levels of UK investment in renewable energy technologies are much
smaller than our competitors;
The UK's Climate Change Programme will be published
this year. It will set out how the UK intends to deliver our target
from Kyoto to reduce greenhouse gas emissions and move towards
our domestic goal to cut emissions of carbon dioxide. The programme
will outline action from all sectors of the economy and will provide
more information about the changes the UK will need to make to
meet longer reduction targets beyond 2010. A draft programme was
published earlier this year, which estimate that the policies
and measures it set out could cut greenhouse gas emissions by
21.5% below 1990 levels in 2010 17.5% in carbon dioxide
alone
The Climate Change levy's exemption for electricity
produced from new renewables will provide a significant boost
to renewables generation. As part of the Energy Efficiency Fund,
set up with revenues from the climate change levy, ú39m
over 3 years has been provided for DTI to promote new renewable
technologies, such as offshore wind power. ú12m over
3 years has been allocated to MAFF to support the development
of energy crops.
On October 24 the Prime Minister announced that a
further £50m is expected to be made available to offshore
wind and biomass from the New Opportunities Fund. This funding
is additional to substantial boost that the sector will receive
from the "Renewables Obligation". This requires licensed
electricity suppliers to supply a specified proportion of their
supplies from eligible renewable sources. The Government's aim
is to see 10% of generation coming from renewable sources by 2010,
subject to the cost to consumers being acceptable. This would
represent a very large increase on the current level, which was
2.8% in 1999.
water, where a failure to implement the
polluter pays principle through a pesticides tax is resulting
in substantial hidden subsidies for intensive farming as against
organic farming for example, and extra costs borne by householders
and business through water prices;
The Government's consultation paper "Economic
Instruments for Water Pollution", published November 1997
sought views on taxes on fertilisers and pesticides. Responses
highlighted the difficulties involved and the Government decided
not to proceed with a water pollution tax.
The Government remains committed to tackling water
pollution from agricultural and other diffuse sources. For fertilisers,
additional Nitrate Vulnerable Zones (within which farmers must
take specified measures to reduce nitrate leaching) are expected
to be designated under the Nitrates Directive next year.
The Government's response to the Committee's 4th
Report (PBR 1999 Pesticides, Aggregates and the Climate
Change Levy)[232] explained
that given the high levels of improvements already planned
for point source discharges a national tax or charge on
point source water pollution would not be the best way of proceeding.
However, the Government agrees that, in order to safeguard water
quality, it is necessary to look at diffuse sources of pollution
as well. The Department of the Environment, Transport and the
Regions intends to encourage the Environment Agency to focus more
regulatory effort to this area, particularly where bathing water
or river water quality is threatened.
The Government has made very clear that a pesticides
tax could be a useful tool in addressing the environmental impact
of pesticides use. Following discussions with the Crop Protection
Association over a possible voluntary package of measures to reduce
the environmental impact of pesticides use, the Chancellor decided
not to introduce a tax on the use of pesticides in Budget 2000.
As the Government's response to the Committee's 4th
report indicated[233],
there has been an opportunity for all interested parties to express
their views on the Crop Protection Association's proposals which
were published in April. DETR sent out copies of the document
to about 300 organisations and individuals likely to have an interest.
Over 280 replies have been received and the Pesticides Forum and
Advisory Committee on Pesticides have considered the proposals
and recorded their views.
transport, where steady increases in the
overall cost of car usage and steady improvements in the availability
of real alternatives (better public transport, more efficient
vehicles and alternative fuels)must go hand in hand.
The transport sector has a key role to play in helping
to achieve the Government's environmental targets. The Ten Year
Plan, which DETR published in July, outlined the Government's
plans for investing in transport over the next ten years, and
set out a series of targets, including improvements to public
transport. We are also working hard to improve the environmental
performance of vehicles. The EC Voluntary Agreements with the
motor manufacturers will result in a 25% reduction in the CO2
emissions from the average new car, and the introduction of new
'Euro' standards in 2005 will introduce even more stringent standards
for emissions of local pollutants than those introduced this year.
Within the Government's overall transport strategy,
it has pursued a number of different policies to increase the
environmental effectiveness of taxes on road transport. For example,
the Government has undertaken reforms to the car VED system in
order to relate the cost of VED to the level of CO2 emissions
for new cars from March 2001, and has taken steps to encourage
the manufacture and takeup of cleaner fuels. The Government
has also announced a major revenue neutral reform of company car
taxation to help protect the environment. Amongst other things,
these reforms are expected to reduce substantially CO2 emissions
and to improve local air quality.
The Government is also encouraging the development
and use of alternative fuels and technologies. The Government
has substantially increased the funding for the Powershift Programme,
and intends to increase support to encourage the early introduction
of emerging technologies such as hybrid and fuel cell vehicles
that offer potentially significant reductions in emissions of
local air pollutants and greenhouse gases. The action which has
been taken through the taxation regime to encourage low emission
vehicles supports these programmes.
(f) The Government should revise the Code
for Fiscal Stability, which contains the principles of fiscal
management, to incorporate its commitment to sustainable development.
As required by the Finance Act 1998, the Code for
Fiscal Stability sets out how the Government will apply the key
principles of transparency, stability, responsibility, fairness
and efficiency in its formulation and implementation of fiscal
policy and its policy for the management of the National Debt.
Under the principle of stability, the Code indicates
that, so far as reasonably practicable, the Government will operate
fiscal policy consistent with high and stable levels of growth
and employment. The principle of fairness means that the Government
will take into account the financial effects on future generations,
as well as its distributional impact on the current population.
The Government sees no reason to change the Code.
Looking across the sustainable development
agenda
(g) We expect much more discussion of environmental
impacts alongside social and financial issues in the earlier "mainstream"
parts of Budget Reports, and of the implications of Budget measures
forat the very leastthe 'headline' set of indicators.
All Budget measures are screened for environmental
impact and Table 6.2 in Budget 2000, and similar tables in earlier
documents, provide estimates of all significant effects on the
environment from Budget measures. This includes details of associated
headline indicators of sustainable development. The Government
believes bringing together these impacts in a separate table within
a dedicated environmental chapter is a better way of illustrating
the overall environmental impact of the Budget measures than a
more piecemeal discussion of environmental impacts scattered throughout
the document.
(h) Given the scale of the environmental challenges
facing the UK, the Government must set longer term goals and annual
targets by which we can measure our progress year by year.
The Government has a strong vision of sustainable
development, to ensure a better quality of life for current generations
as well as for those in the future. We welcome the EAC's recognition
of the scale of environmental challenges which the UK is facing,
and agree with the need for long term goals.
The Government has a number of such long term goals,
including targets for reducing greenhouse gas emissions and increasing
waste recycling both by 2010. And on both of these issues a clear
signal been given that further progress beyond these targets will
be essential. The Government's waste strategy and the requirements
of the EU Landfill Directive set out targets on waste that must
be met by 2015 and 2002. However, longer term targets for reducing
greenhouse gas emissions must be agreed internationally, reflecting
the global challenge of climate change, and the Government believes
the UK could place itself at a disadvantage in future negotiations
by setting a target unilaterally.
To help monitor the progress of sustainable development
objectives including the prudent use of natural resources
and the effective protection of the environment the Government
has developed a set of "headline" indicators. These
give a broad overview of trends and are backed up by a larger
set of almost 150 indicators. In December 1999, the Department
of the Environment, Transport and the Regions published a "baseline
assessment" of all the indicators Quality of life
counts aiming to provide a benchmark against which future
progress can be measured. Annual reporting will include updates
on the smaller and more manageable set of headline indicators.
Moving down the green tax agenda
(i) The Government must be consistent when
comparing environmental costs for proposed green taxes. It should
establish direct and indirect financial costs in all cases, and
should clarify its approach to identifying and estimating nonfinancial
impacts.
The Government agrees that identifying, quantifying
and valuing the environmental impacts at which green taxes and
other measures are targeted needs to be done consistently and
as comprehensively as resources and the current state of knowledge
allow.
In the case of pesticides, the Government has reviewed
the evidence and is aware of the broad magnitude of the costs
imposed on water companies to remove pesticides as a result of
targets laid down in the EC Drinking Water Directive. More information
is given in the 1999 report by consultants ECOTEC, Design of
a Tax or Charge Scheme for Pesticides (see http://www.environment.detr.gov.uk/pesticidestax/index.htm).
Section A3.1 of this report states that "Estimates as to
the costs of this treatment are as high as £1 billion, with
annual operating costs estimated between £50 and £120
million."
A consistent approach was applied in the case of
aggregates, but as the principal impact, and thus the principal
concern, was the amenity effect, indirect financial costs were
not significant.
The Government shares the Committee's view of the
importance of a clear approach to identifying and estimating nonfinancial
environmental impacts, and DETR will be publishing a guidance
manual on how to use stated preference valuation techniques for
expressing costs and benefits in money terms.
(j) We reiterate our support for a Green Tax
Commission as our preferred option for the promotion of environmental
tax reform, especially in view of the support for this idea expressed
by the UK Round Table on Sustainable Development. In the interim
we recommend that the remit of the new Sustainable Development
Commission should include a responsibility to advise HM Treasury
on sustainable development economic instruments.
The Government is committed to pursuing the environmental
tax agenda in an open and consultative manner. This has been demonstrated
on many occasions. Since Budget 2000, for example, the Government
has consulted on :
the criteria which should be used to define
energy efficient technologies qualifying for enhanced capital
allowances under the climate change levy package;
the recent proposals from the Crop Protection
Association for a voluntary package of measures to reduce the
environmental impact of pesticides use; and
what the objectives of the new aggregates
sustainability fund should be and how these can best be delivered.
The case for introducing a Green Tax Commission will
be kept under review but it is not obvious what such a Commission
would add to existing arrangements, There are already numerous
bodies which provide advice to the Government on environmental
issues, including the Trades Unions Advisory Committee on Sustainable
Development and the Commission for Integrated Transport, and these
naturally refer to economic instruments such as tax as well as
other policy areas.
The Government has read the recent report of the
UK Round Table for Sustainable Development with interest and will
respond in due course. The Government expects the new Sustainable
Development Commission to continue the excellent work of the UK
Round Table.
Procurement.
(k) We were disappointed that the Government's
response failed to address our recommendation that Partnerships
UK (the new body responsible for assisting the development of
PPP and PFI projects) should have sustainable development included
in its aims and objectives. We expect the Government to remedy
this situation in line with our recommendation.
Partnerships UK will be a public private partnership:
a joint venture with the public sector owning a minority interest
and the private sector owning a majority. PUK will operate on
commercial basis, as a risktaking private sector body. Its
primary aim is to address the skill deficit on the public sector
side of the PFI/PPP procurement process. PUK will have a majority
of private sector investors and, while sustainable development
is an important concern for all companies, it would be inappropriate
for the Government to include provisions on sustainable development
in the memorandum and articles of this kind of commercial entity.
Nevertheless, PUK is involved in a number of environmentally
friendly projects in the fields of public transport, waste management
and urban regeneration. These are producing positive environmental
benefits which would not otherwise have been delivered so quickly.
Furthermore, PUK's governance structure has been designed to balance
private sector disciplines with PUK's public sector mission. PUK's
Advisory Council consisting of representatives from Government
departments, the devolved administrations, local authorities and
other public bodies will be responsible for safeguarding
its public sector mission.
The Committee may also be aware that DETR is currently
preparing guidance for Departments on how to promote sustainable
development objectives through PPP/PFI projects. We anticipate
that this will be available early in the New Year
(l) The Government should work much more systematically,
within the framework of EC regulations, to promote "green"
procurement.
The Government welcomes this recommendation from
the EAC but regrets that the guidance is found to be confusing.
Procurement policy is based on securing value for money, taking
account of propriety and regularity. But it should not obstruct
the delivery of policy and there is scope to take account of environmental
factors, as is made clear in the joint Treasury/DETR note. Department's
are free subject to afford ability to specify requirements
in green terms, in line with their green strategies, and to award
contracts on the basis of whole life costs and quality.
There is also scope—subject to EC and international
procurement requirements—to take account of process standards
and management systems, providing they are nondiscriminatory
and that other ways to meet underlying requirements are considered.
These issues are currently being discussed in the Community and
we would not want to review current guidance until these discussions
are concluded.
Climate Change Levy
(m) We are concerned at the slow progress
of negotiations on the Climate Change Levy whose target date for
introduction is April 2001. This is causing considerable uncertainty.
Progress towards the conclusion of the climate change
levy negotiated agreements is being made to the expected timetable
and the climate change levy will be implemented as planned from
April 2001.
Negotiations are proceeding with 46 trade associations
or similar bodies. Generic agreement documents which will
be elaborated for use with specific sectors are now nearing
completion. Each agreement will contain energy / CO2 savings targets
over a 10 year period. In addition, a first draft of a package
of information for prospective participants has been circulated
to industry sectors. Both Government and the eligible sectors
are working hard towards successful conclusion of the agreements.
Negotiations of this type and scale are unprecedented and both
issues of principle and very detailed points have had to be addressed.
Furthermore, the negotiations have had to run in parallel with
the development of the climate change levy itself, and alongside
the development of carbon trading in order to give participants
scope to meet their targets by trading.
Industry sectors have made considerable efforts to
respond swiftly to proposals made by the Government, bearing in
mind the need for trade associations to consult their membership
at key stages. Similarly, the Government's negotiating team has
worked hard to accommodate the particular circumstances of the
sectors and to progress the discussions as quickly as possible.
Although the need for the UK to gain EU State Aids
clearance for the negotiated agreements process and associated
measures has been known from the outset, this has also contributed
somewhat to uncertainty. Discussions linked with the revision
of the Commission's State Aid guidelines for environmental protection
have delayed the Commission's final decision. Understandably,
sectors have been wary of this uncertainty. Indications from the
Commission seem favourable and, although discussions are ongoing,
the Government is optimistic of success for the applications.
These factors, in conjunction with the need to ensure
that there is appropriate linkage with systems such as the new
Pollution Prevention and Control regime and the proposed emissions
trading scheme, have caused the negotiations to be protracted..
However, it is vital that the agreements take into account the
legitimate concerns of the industry sectors, are both realistic
and challenging, and do achieve real energy or carbon savings.
Negotiation to achieve these objectives is, necessarily, a lengthy
and timeconsuming process. There are no short cuts.
VAT on energysaving materials
(g) The Treasury, in consultation with the
DETR, should extend the reduced rate of VAT to cover products
with significant energysaving features such as lowemission
glass and energyefficient boilers.
In Budget 2000 the Government took the major step
of reducing the rate of VAT on the installation of energy saving
materials in all homes to 5 per cent, the lowest rate allowed
under EU law. On 1 April 2000, the reduced rate was extended to
cover the installation of: insulation; draught stripping; hot
water and central heating system controls and solar panels. This
will help combat fuel poverty and reduce wasteful carbon emissions,
bringing economic and social benefits to householders and reducing
the threat of climate change.
The Government has chosen to apply the reduced rate
to certain items of particular concern to this Government, but
it recognises that it is prudent to be selective when targeting
tax reliefs. The Government has therefore chosen to target the
reduced rate on installing materials whose primary purpose is
energy saving. Any energy saving from "lowemission"
glass and "energy efficient" boilers is incidental to
the main purpose of the goods, and so the reduced rate does not
apply to their installation.
30 October 2000
232 Fourth Report from the Committee, 1999-2000, The
Pre-Budget Report 1999: pesticides, aggregates and the Climate
Change Levy, HC76. The Government's response was appended
to the Sixth Report, 1999-2000, HC404. Back
233 Ibid. Back
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