Select Committee on Environmental Audit Appendices to the Minutes of Evidence


Memorandum from Friends of the Earth


  1.  Friends of the Earth (England, Wales and Northern Ireland) is an environmental pressure group with a membership of more than 113,000 and a network of 250 local groups. We are part of Friends of the Earth International which has member organisations in 61 countries.

  2.  We are strong advocates of environmental tax reform as a crucial step in delivering a cleaner and better-protected environment, a more dynamic and sustainable economy and improvements in social inclusion and environmental justice. Our briefing series "Blueprint for a Green Budget", published ahead of each Budget and Pre-Budget Report, has been produced since 19961.


  3.  Since July 1997 the environment has been placed "at the core of the Goverment's objectives for the tax system"2. The Government's intention is to reform the tax system to shift the burden of tax from economic activities that should be encouraged, such as employing people, to those that should be discouraged, such as environmental pollution.

  4.  The Government has committed to such a tax-shift because it is convinced that as well as environmental benefits it will "deliver a more dynamic economy . . . to the benefit of everyone"3. For example, it can provide a driver for delivering the objectives recently set out by the Department of Trade and Industry concerning improved productivity in respect to inputs of energy and materials4.

  5.  But the Government is at a crucial early stage in this process of environmental tax reform. Two new environmental taxes (the Climate Change Levy and Aggregates Levy) have been introduced with associated cuts in employers' National Insurance Contributions. At present these new taxes operate at a low rate and the introduction of an escalator for the rate of a third green tax (the Landfill Tax) has not been as part of a tax-shift package. Consequently the tax burden has been shifted only marginally.

  6.  Following this welcome beginning the Government has to take a long-term view of how a substantial shift in the tax base can be achieved. It has to recognise which environmental taxes will bring in a predictable income while changing behaviour at the margin. It also needs to recognise that most green taxes in the medium term will require that a proportion of the revenues are reinvested to ensure the environmental goals of the tax achieved. The recent public debate over fuel duty and the lack of investment in public transport and provision for cycling and walking highlights this point.

  7.  The Government, as a matter of urgency, needs to set out a clear vision and coherent strategy for the environmental modernisation of the tax system. The Statement of Intent on Environmental Taxation, made three years ago, is no longer sufficient as it only concerns the broad principles. The Code for Fiscal Stability also requires redrafting to explicitly include the need to remain within environmental limits. Without such a vision and strategy the Government will be open to the charge of being opportunistic rather than strategic in its use of environmental taxation.

  8.  Most urgently the Government needs to set out a strategy for developing and installing a comprehensive system of carbon-based energy taxation. This is needed both to deliver the substantial cuts in carbon dioxide emissions that are required and to help the UK economy adapt and flourish as improvements in energy efficiency and the expansion of renewable energy generation drive economic change.

  9.  The Pre-Budget Report offered the Chancellor an ideal opportunity to set out such a vision and strategy for delivering a more dynamic economy and a cleaner environment. It would have built on the Prime Minister's recent warning about the environmental crisis and promise to push environmental issues high up his political agenda. It would also have made the Government's position clear ahead of the crucial Climate Change Summit in The Hague. The opportunity was not taken. We hope this will be corrected in Budget 2001.


  10.  The cuts in road fuel duty paid on low sulphur diesel and low sulphur petrol will further jeopardise the Government's manifesto commitment to cut carbon dioxide emissions by 20 per cent by 2010 compared to 1990 levels. At Budget 2000 the `escalator' policy of increasing the rate above inflation by a regular amount was abandoned. The Government's own calculations5 show that it is now likely to fail to achieve this key target for tackling climate change.

  11.  This cut in road fuel duty for effectively all diesel and a growing proportion of petrol will increase traffic growth. This is on top of the increase in traffic growth from 28 per cent to 35 per cent between 1996 and 20106 caused by removing the road fuel price escalator assuming no new measures are taken. Investment in more efficient vehicles is also likely to be delayed as a result. Figures from the car industry show that high fuel taxes are starting to encourage the sales of more fuel efficient cars7.

  12.  Varying fuel duty rates to install price differentials between fuels is a proven way of encouraging the use of cleaner fuels. When the fuel duty escalator was in place a price differential between low sulphur diesel and ordinary diesel was installed while increasing the duty rates of both. Consequently, the incentive to reduce mileage continued alongside the incentive to use a cleaner fuel. In the Pre-Budget Report 2000 the Chancellor has introduced an incentive for a cleaner fuel, in terms of sulphur emissions, by reducing the rate rather than by increasing it by less than ordinary petrol. Consequently, the incentive to drive less has been reduced.

  13.  This runs counter to the Government's commitment to cut carbon dioxide emissions. Earlier this year the Dutch and British governments submissions to a European Commission consultation on low-sulphur fuel both concluded that CO2 emissions were likely to rise as a result of early introduction of low-sulphur fuels8.

  14.  In the Pre-Budget Report 1998 the Chancellor stressed that fiscal measures on transport emissions needed to be recognised that "growth in road traffic offsets the reduction in emissions from individual vehicles". The Pre-Budget Report 2000 does not recognise this explicitly.

  15.  The Chancellor's commitment to install further differentials for "alternative environmentally-friendly fuels" is welcome in principle but we are concerned that consultation over which these fuels might be restricted to "industry". Any further differentials should not reduce the incentive to drive less.

  16.  This cut cannot be justified as being more equitable. The Institute for Fiscal Studies has shown that the poorest households would benefit the least from fuel tax cuts. This is because fewer of these households own cars and those that do drive less compared to middle income households9. In the UK 59 per cent of the poorest 40 per cent of households, do not own a car10. The rural car-owning poor are affected disproportionately by high fuel taxes, but a simple cut in fuel tax would be a blunt and a very inefficient method of dealing with this.

  17.  One relief on road fuel duty that the Chancellor did not make but which would help cut CO2 emissions, urban air pollution and congestion would be to extend the fuel duty rebate to include school buses and express coach services. It would also integrate with the Government's own transport policy.


  18.  We were disappointed that the Chancellor ruled out increasing the tax take from the oil and gas industry. The threats of global climate change demand that the high rate at which fossil fuels are exploited is reduced both immediately and throughout this century. In the medium term Petroleum Revenue Tax will continue to be an efficient revenue-raising tax. Reducing the allowances and exemptions that exist and making a `windfall' rate increase in response to the exceptional profits being made with the price of oil so high would raise extra revenue and increase the taxation of fossil fuels.

  19.  The UK tax regime for the oil industry, a major contributor to climate change, remains one of the most lenient in the world. The total allowances and exemptions from the tax are estimated to cost £1.1 billion in 1999-2000. This does not include the exemption for all fields approved for development after 15 March 1993. Although Budget 2000 tightened two loopholes in these exemptions it also granted two further tax reliefs to the oil industry by extending capital gains roll-over relief and introducing capital allowances for using machinery and plant under an oil production sharing contract.

  20.  The extra revenues from closing these loopholes and raising the rate could be used to invest in the undoubted strength of the UK offshore engineering industry through a major programme to develop offshore wind technologies. This would also offer the opportunity to reinvest a proportion of tax revenues from an industry which faces a slow decline and is a principle cause of climate change to an industry of the future with considerable export potential and which is a key part of the solution to the threat of climate change.


  21.  The VED reforms announced in the Pre-Budget Report can claim little environmental justification as the Chancellor implied.

  22.  Friends of the Earth lobbied hard for a set of differential rates in VED to encourage investment in cleaner more fuel efficient vehicles. We welcomed the initial reforms announced in Budget 2000. In this Pre-Budget Report, however, the lower rate was extended to bigger cars and lorries received an across the board reduction. The Chancellor would have done better to reduce the rate for the cleanest and most efficient vehicles by more and increased it for the most fuel hungry and polluting.

  23.  The claim that reducing tax on car ownership is an environmental measure only holds if the tax burden is shifted to car use and the Chancellor reduced both in the Pre-Budget Report.


  24.  Friends of the Earth has campaigned over several years for a cut in VAT on the renovation and refurbishment of empty dwellings. We welcome the cut to 5 per cent on residential renovation and 0 per cent for those homes that have been empty for at least 10 years. We also welcome the accelerated payable tax credits for cleaning up contaminated land; the 100 per cent capital allowances for creating `flats over shops' for letting; and the consultations on other specific tax reliefs.

  25.  The Chancellor is overly optimistic to imply that these VAT cuts together with the exemption from Stamp Duty for house sales in the msot deprived areas will reduce pressure of greenfield housing development. This will not come close to providing house-builders with a significant incentive to shift from greenfield to brownfield sites.

  26.  Introducing VAT at 5 per cent on new-build housing with an exemption for the same target areas would have installed such an incentive. Harmonising VAT rates for new-build housing and renovation of empty homes at 5 per cent would also have removed the remaining perverse incentive in favour of new-build housing.


  27.  We welcome the Chancellor's rejection of the latest voluntary package from the pesticide industry. Remaining lawful and paying less are clear, strong and universal motivations to comply with regulations and economic instruments. The three motivations for compliance with voluntary measures put forward by its advocates, peer group pressure, bottom-line benefits and credibility, are not as clear, never as strong and usually only felt by a small proportion of those who need to comply. In this particular case as the pesticide industry has been asked to come proposals that should include a reduction in its market it is hardly surprising the result was so weak.

  28.  We are disappointed that the Chancellor did not as a result announce public consultation on the design of a package of measures that would accompany a pesticides tax. The reinvestment of the revenues in measures to help farmers respond to the tax incentive to reduce pesticide use is a crucial part of such a package.

  29.  Experience from other countries, including Sweden, Austria and Denmark, has shown that a pesticide tax package of measures is a highly effective method of reducing pesticide use. In Sweden and Denmark, reductions in total pesticide use of 65 per cent over nine years, and 30 per cent over seven years, respectively have been achieved.

  30.  Measures to encourage conversion to organic farming can play a key role in the package. The rapidly expanding market for organic produce offers farmers the opportunity to meet consumers' preferences without paying such a tax. A proportion of the revenues from a pesticide tax should be used to directly support existing organic operations, and conversion from chemical intensive systems to organic. Recently the Government set aside £16 million to support farmers converting to organic systems over a two year period but within demand was such that within six months the total amount was accounted for. The research on a pesticide tax commissioned by the Government11 suggested that revenues would be in the range £84 to £131 million per year which could comfortably support a scheme meeting such high demand from farmers.

December 2000


  1.  These briefings together with FOE's responses to consultations on specific environmental taxes are available at

  2.  HM Treasury, 2 July 1997 "Tax measures to help the environment".

  3.  HM Treasury, 2 July 1997 "Environmental Taxation—Statement of Intent".

  4.  Department of Trade and Industry, 2000. Sustainable Development Strategy.

  5.  Climate Change: Draft UK Programme.

  6.  Commission for Integrated Transport "National Road Traffic Targets" paragraph 2 (November 1999).

  7.  Data from the Society of Motor Manufacturers and Traders.

  8.  ENDS Daily, Sulphur-free fuel seen increasing CO2 emissions, 12 October 2000.

  9.  Institute for Fiscal Studies `The petrol tax debate' (September 2000).

  10.  Data from National Travel Survey.

  11.  ECOTEC Research and Consulting, 1999. Design of a Tax or Charge Scheme for Pesticides. London, DETR.

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