Select Committee on Environmental Audit First Special Report




Responses to recommendations and conclusions

(a) The Committee has found no evidence that the Government has carried out a comprehensive environmental appraisal of its Pre­Budget measures which would even satisfy its own guidance in this area. For example, the Pre­Budget Report does not refer to any assessment of:

    —the expected effect of the duty cuts on car use;

    —the local air quality benefits of Ultra Low Sulphur Petrol (ULSP) against the additional carbon dioxide emissions generated in its production and how far these will be counteracted by more fuel efficient engines in the longer term;

    —how far the new VED rates for lorries reflect their environmental costs.

The Budget sets out an environmental appraisal of the Government's Budget measures. In response to the specific points you raise:

Effect of duty cuts on car use:

The Government expects the duty cuts to have only a minimal effect on car use: modelling work by the DETR suggests that the reduction in fuel duty will increase traffic by around 0.2% by 2010 relative to 2000 levels. This is an estimate for England only which represents 85% of traffic in Great Britain. This is against a background increase of 17% between 2000 and 2010 (17% figure includes impact of 10 Year Plan).

Benefits of ULSP:

Any small increase in CO2 emissions from increased desulphurisation at the refinery should be offset over time by more efficient refining processes. Furthermore, as low sulphur fuel is required for the effective use of GDI technology, the CO2 benefits from the adoption of this technology should over time outweigh any minor CO2 increase at the refinery.

Lorry VED reforms:

The new lorry VED scheme will improve the environmental signals that lorry VED sends out. Vehicles that cause higher levels of track and environmental damage will pay higher rates of VED than those causing less damage.

(b) The Committee is not satisfied that the Government took its Pre­Budget decisions on fuel duty, Vehicle Excise Duty (VED), and company car taxation on the basis of a comprehensive appraisal of the trade­offs between its social, economic and environmental objectives. It is therefore difficult for the Committee to be convinced that the Pre­Budget transport measures will have the overall, positive environmental impact which the Government assumes.


(c) With so little evidence presented, we can only rest on the Government's earlier views that higher fuel prices have curbed demand for fuel, helped decouple levels of traffic and economic growth and are the best way known to encourage fuel efficiency. The relevant Pre­Budget press notice states that "the environmental benefits of higher fuel prices must be balanced with the Government's social and economic objectives". However, this balance has never been set out.

The Chancellor considers many different variables when making decisions on taxation. Therefore it is not possible to set out in a formal equation which factors are considered or the relationship between them: just as we do not do this for most other taxes or indeed spending decisions. It is a complex relationship. The Government has to consider other environmental policies and relative priorities; other social concerns and relative priorities; and a range of economic factors.

(d) The Committee is disappointed that the Government only highlighted the revenue­raising aspects of fuel duty during the recent fuel crisis and neglected to make the link to its role in meeting the Government's environmental objectives.

The Government agrees that there is a need for all advocates of environmental policies to make their case more forcefully.

(e) The Committee welcomes the Financial Secretary's assurance that the Treasury would reconsider the need for a fuel duty escalator in the light of a future sharp fall in the price of crude oil. If this assurance were formalised it would salvage some form of long­term pricing signal. This should be coupled with a commitment to developing public transport and alternative fuels.

The environmental benefits of higher fuel prices must be balanced with the Government's social and economic objectives. Hence since PBR 1999 decisions on future changes in fuel duty are taken in the light of environmental, economic and social objectives. In meeting these objectives the Chancellor considers many different variables when deciding fuel duty levels. One of these is the oil price. But the oil price is not the only factor.

However, there is a good reason why the Government should not set a target pump price. This would send a signal to OPEC about how much it can squeeze production to maximise its profits and lead to the erosion of fuel duty revenue and a transfer of resources from the UK to OPEC

In the 10 Year Plan for Transport the Government has set out a major programme for investing in public transport as well as developing viable alternative greener fuels through the Green Fuel Challenge.

(f) 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.

The Government reduced the duty on Ultra Low Sulphur Diesel by 3p/l to maintain the existing balance between the duty rates on the main forms of petrol and diesel—following the 3p/l cut in duty on Ultra Low Sulphur Petrol since Budget 2000. The Government believes that the existing duty balance is correct because it reflects the fact that diesel and petrol have different environmental merits. Diesel cars tend to produce less CO2 than their petrol equivalents, but more emissions of nitrogen oxides and particulates—the two air pollutants of most concern. Other policy instruments address the petrol­diesel balance and the Government would not want to distort their effect by changing the duty balance.

The duty reduction on unleaded is temporary and will end on 14 June 2001. The duty reduction is necessary to guard against any disruption to the wholesale and retail markets in the final stages of transition to ULSP. By 14 June 2001 the Government expects ULSP to be available to all petrol retailers.

(g) 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. In environmental terms, the move flies in the face of the estimates of the National Economic Research Associates (NERA) report and, therefore, the Polluter Pays Principle.

The new VED scheme will improve the environmental signals that lorry VED sends out. Vehicles that cause higher levels of track and environmental damage will pay higher rates of VED than those causing less damage. The restructuring of the bands has taken into account the findings of the NERA report into lorry track and environmental costs. In longer term, the Government will review the operation of the Reduced Pollution VED discount and intends to introduce lower rates for new Euro IV vehicles from around 2004.

Furthermore, the first allocation from £100 million Haulage Modernisation Fund shows that the Government is committed to reducing the environmental impact of the UK haulage industry, through earmarking up to £30 million for retrofitting older lorries operating in areas of pool local air quality and £15 million for fuel efficiency advice that should reduce carbon emissions.

(h) 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.

The Government welcomes the Committee's recognition that the changes to company car taxation support cleaner greener motoring. The Government intends to monitor the impacts of this measure, as it does with any tax measure. An extensive evaluation of the reforms to company car taxation and taxation of business mileage payments will be undertaken through analysis of Inland Revenue data and by surveys of employers and employees.

(i) Most witnesses agreed on the key stages of evolution that the motor car will undergo in the future: ultra clean vehicles by 2005, breaking the 100 mile per gallon barrier, and then to carbon­free emission­with hydrogen as the front runner. The oil and motor industry seems to be agreed that hydrogen is likely to be the fuel of the future. However, there is no real consensus on how the UK might get to a hydrogen economy, what type of hydrogen systems should be used (and therefore the supply infrastructures that will be required), and what, if any, interim steps are necessary.

In the summer, the Government will issue a Powering Future Vehicles consultation paper. This will consider the Government's role in relation to the move to a low carbon transport system. It will focus on fuel cell, hybrid and advanced battery vehicles; and identify what the barriers are to the development, delivery on to the market; and consumer take­up of these vehicles. Following consultation, the Government will publish a Powering Future Vehicles Strategy by the end of the year.

(j) The Committee welcomes the Chancellor's Green Fuel Challenge as positive, fiscal incentive to bring new fuels to market. The "well to wheel" approach should help to ensure that the environmental and social trade­offs are clear for whichever fuels are chosen.

The Green Fuels Challenge was widely welcomed. The Government is keen to stimulate interest in developing and producing profitable alternative fuels which offer environmental benefits over current conventional fuels.

(k) The Committee notes the Environment Minister's assurance that the Green Fuel Challenge is not formally restricted to fuels relying on existing infrastructures. However, the Committee recommends that the Government seeks a suitable forum to debate and develop a long­term strategy for alternatives to fossil fuels in road transport and the policy changes which would be needed to realise such a strategy.

The Powering Future Vehicles consultation paper and strategy will address these issues.

(l) The Committee recommends that the Government encourages the Advisory Committee on Business and the Environment (ACBE) to consider how the work of bodies such as the Cleaner Vehicles Task Force, Foresight Vehicle Programme and Carbon Trust, supported by the assessments resulting from the Green Fuels Challenge, could be co­ordinated to this end in the course of its work to develop a new framework for promoting the low carbon economy. This framework needs to take account of tax and spending decisions designed to encourage the use of hydrogen and other forms of transport with lower carbon emissions.

One of the Government's key aims is to take steps towards a low carbon economy, and the development of transport fuels and technologies that can offer significant environmental benefits in the longer term is part of this.

In achieving this aim, the Government recognises the need to take a strategic approach to the long­term development of greener transport fuels and technologies. The Powering Future Vehicles Strategy will draw on the work of a number of bodies, and responses to the consultation process, and will set out this strategic approach.

(m) 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 energy­saving features—as is the case with such installations under its own schemes.

The reduced rate of 5 per cent applies to the installation of energy saving materials in all homes. It is limited to installations of certain goods (insulation materials, draught stripping, central heating and hot water system controls, solar panels, and wind and water turbines) whose primary purpose is energy saving.

The VAT reductions are a targeted measure where the main purpose is to deliver energy savings. It is not obvious that expanding the reduced rates would deliver effective, targeted results. Furthermore, to extend the reduced to goods whose energy saving potential is the secondary purpose would blur the clear borderline which currently exists and would inevitably lead to calls for the relief to be further extended to other products with lesser energy saving potential. Such a measure would be extremely expensive and the lost revenue would have to be made up from elsewhere.

The new Green Technology Challenge announced in Budget 2001 offers the opportunity to expand the support for energy saving technologies.

A wider range of goods qualify for relief when installed under grant­funded schemes, targeting resources where they are needed most, by the less well­off and pensioners.

(n) We recommend that the Chancellor allows reference to this Report—a 'tag'—to appear on the Order Paper on Budget Day.

The Government was unwilling to 'tag' the Report to the debate on the Budget Resolutions because it would have given undue prominence to a select committee report which had a relatively narrow focus. The Committee's Report would have been the only document which was tagged, giving it a disproportionate significance in Parliamentary terms in the wider context of the Budget Statement and the ensuing four­day debate.

(o) 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.

Under current law, conversions are standard rated for VAT and new houses are zero rated.

The package announced in the Budget, worth £1 billion over 5 years, represents a formidable response to the recommendations made by Lord Rogers and goes a significant way in contributing to the Government's regeneration objectives. It targets resources where the market failures are greatest and where they will do the most good. It is an ambitious package and has been widely welcomed. However, the Government has no current plans to make radical changes to the VAT base. That would require detailed research into the likely social, economic and environmental effects.

(p) The Treasury's environmental appraisal of its budget measures appears to be little more than a summary list of the impacts of its environmental measures­even at that there are some significant presentational flaws.

The Government carefully considers the environmental impact of all Budget measures and in table 6.2 describes the impact of measures on the environment whether these be positive or negative.

 Furthermore, the Government does not believe there is any clear value added by having a long list of measures with 'No significant environmental impact' printed alongside

(q) The Treasury should improve the presentation of its environmental appraisals as set out below:

The Government has responded to the EAC's concerns with the presentation of Tables 6.1 and 6.2 of Budget 2001, which it hopes the Committee will welcome.

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

The Government's position on the presentation of the environmental appraisal table of Budget measures is quite clear. Measures are included where they have a significant environmental impact or serve an environmental purpose.

The table includes all such measures—although it does not include measures which are subject to consultation—selecting particular options could give a misleading signal of the Government's intentions.

    —drawing distinctions between overall impact and changes made (ie. where benefits remain but have been reduced);

The Government has responded to criticism from the EAC that changes in estimates of environmental impacts when the FDE was abolished in PBR99 were not easy to follow. Government has given detailed evidence to EAC on this. And table 6.2 of Budget 2001 sets out clearly the impact of carbon emissions of both the fuel duty escalator (1996-99) and the Budget 2001 transport package.

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

The footnotes to Tables 6.1 of Budget 2001 identify nine separate strategic statements and analysis of Government policy. The footnotes to Table 6.2 identify the source of every one of the quantified impacts.

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

The Government is committed to appraising the environmental impact of all proposed budget measures. In table 6.2 the Government has implemented or fully intends to implement every measure identified in Table 6.2 of Budget 2001.

(r) We have seen no evidence of any action on the commitment to evaluate environmental measures annually. 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.

It is hard to understand the EAC's recommendation as every PBR and every Budget includes the latest and best environmental appraisal of Budget measures to date.

Furthermore details of references can be found in the footnotes to Table 6.2, which identifies the source of every one of the quantified impacts.

The Government is fully committed to the environmental appraisal and evaluation of all Budget measures and has set out the appraisal clearly but obviously cannot consider outcomes until the measures have been fully implemented.

(s) The Treasury should demonstrate, perhaps initially as a one­off exercise for the next Pre­Budget Report, how it appraised the environmental implications of all its proposals. This would increase the confidence of outside observers, including Parliament, in this process.

The Government already sets out the environmental impact of all Budget measures. The supporting documentation referred to in the footnotes and repeatedly sent to the Committee has provided information on the methodology used to provide these estimates.

1   For clarity, the Committee's recommendations are shown in bold with the Government's responses below Back

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Prepared 25 July 2001