Select Committee on Environmental Audit Minutes of Evidence

Annex 1: Coming Clean: Principles for applying environmental taxation


  The objective of environmental economic instruments is to influence polluter behaviour in the face of externalities, not to raise additional revenue or tax general consumption.


  Economic instruments such as taxation may be justified when:

    —  Producers or consumers do not bear the full cost of the pollution they create

    —  Marginal benefits of the measure exceed or at least equal the marginal cost of compliance

Guiding principles

    —  Environmental rationale—the tax system must be seen by all parties to be achieving a valid environmental objective. Sound science is essential for effective environmental policy, even if it does not imply absolute certainty. If the scientific base is not fully proven, the nature of the uncertainty should be taken into account in the design of the instrument.

    —  Economic rationale—the tax system must be seen by all parties to be more flexible and cost-effective than other ways of achieving the environmental objective. Its role should be to encourage innovation amongst the participants. The tax must be designed in a way to take full account of its impact on UK business competitiveness, and be consistent with the international trade obligations.

    —  Fiscal neutrality—new environmental taxes should be revenue neutral, except when spent on related activities in cases where the spending can be justified.

    —  Simplicity—simplicity is essential and deviations from simplicity should only be introduced when demonstrably necessary. Multitudes of academic and institutional studies, of ever increasing complexity, have been undertaken seeking illusionary perfection. No system will be perfect and good simple, pragmatic solutions will succeed where more complex ones will fail.

    —  Compatibility—a tax system should be consistent with other policy measures. New tax measures should take into account the structure of existing taxes and regulation, reworking them if necessary to minimise distortion

    —  Equity—the tax system must not result in competitive distortions between companies and sectors.

    —  Transparency—the system must be transparent so that there is national confidence. An imperfect system with good transparency is to be preferred to any system with poor transparency.

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Prepared 11 December 2001