House of Commons - Environmental Audit

Select Committee on Environmental Audit Second Report

The role of the Treasury

A new Statement and strategy?

35. The Statement of Intent was originally issued in May 1997. However, in the PreBudget Report 1999, the Government restated it but in a slightly revised form which weakened its strategic flavour. The 1997 version states that "over time, the Government will aim to reform the tax system", whereas the 1999 version states that "the Government will consider using the tax system...on a case by case basis". In our view, this represents a significant change in emphasis, and it is noticeable that the Government has consistently referred to 'on a case by case basis' in subsequent documents.[39] We regret the fact that the Treasury has retreated from a strategic commitment to environmental tax reform, by diluting the language used in the original Statement of Intent. Together with other factors discussed below, it suggests that the Treasury's approach is indeed ad hoc.

36. There is also an issue relating to the coverage of the Statement of Intent. Both Friends of the Earth and the Green Alliance have argued that the current Statement is too narrow in focussing only on environmental taxation, and they have called for a new Statement which covers not only the role of environmental taxes but also positive tax incentives, wider economic issues, and in particular the Spending Review process. They also see such a Statement as an opportunity for the Government to renew its commitment to this agenda.[40]

37. We agree that environmental protection and sustainable development should be incorporated properly into all departments' aims, objectives and targets—not least those of the Treasury—so that they form an overarching framework within which all policies and measures are formulated. This is unfortunately not yet the case at the Treasury, and in March last year we expressed our concern to the then Financial Secretary that the one environmentally-related target in their 1998 Public Service Agreement had been dropped in 2000.[41] Until the Treasury embraces environmental protection and sustainable development more comprehensively, we believe that the Statement of Intent should remain a satellite document, augmenting the Treasury's main aims and objectives; and that its focus be kept as sharp and clear as possible, to underpin the Treasury's approach to all existing and proposed taxation and fiscal incentives. We consider that the 1997 text fully supports such an agenda.

Treasury research to support a strategy

38. In discussing specific tax measures earlier in this report, we have highlighted a wide range of areas where we would have expected the Treasury to be carrying out work if it was seriously committed to implementing a tax strategy focussed on environmental and sustainable development objectives. These include:

the scope for simplifying policy instruments in the energy area;
research on the cost externalities associated with the use of pesticides and fertilisers;
the scope for increasing landfill tax rates and reviewing the fiscal treatment of inert waste;
the scope for introducing an incinerator tax;
research on the effects of abolishing the fundamental perverse VAT incentive to build on greenfield sites; and
the provision of greater financial incentives for businesses to pursue environmental objectives.

39. Our impression is that there is very little public knowledge of what research the Treasury is in fact carrying out. This is supported by the comments of the Friends of the Earth "We are not always clear about what research they are doing...If Treasury are looking at a particular tax measure, sometimes the research involved is a public exercise, as with, say, the Aggregates Levy. In the case of the Green Technology Challenge...they certainly did research looking at how other countries have implemented such a measure; we were not aware of that and we certainly have not seen the results of it...[Their research] tends to be on specific things. On specific instances...we do know what is going on...In the generality, no, we do not know what is going on".[42]

40. We asked the Financial Secretary to tell us what research the Treasury had carried out in the last two years in support of the Statement of Intent. He could cite only two relatively minor pieces of work, and promised to provide further information.[43] The Treasury subsequently sent us a list of the research undertaken.[44] But much of the work cited dates back to the earlier years of the last Parliament: relatively little has been done in the last two years. Moreover, almost all of this work has been carried out by other departments, and it remains unclear to what extent the Treasury has overall responsibility for coordinating and initiating such work. We consider that the extent of Treasury research undertaken to support the Statement of Intent on Environmental Taxation—both directly and in coordination with other departments—is inadequate; and that the Treasury is failing to provide adequate leadership and coordination across central Government.

41. We have in the past recommended the creation of a Green Tax Commission to carry out research on an environmental tax policy in an inclusive and transparent way. In its responses to our reports, the Government has remained intransigent, and Mr Boateng argued vehemently against such a Commission.[45] We accept Mr Boateng's claim that the Treasury has engaged stakeholders when developing fiscal responses to the policy issues that have been identified.[46] But, as our evidence above makes clear, this tends to happen only when the Treasury has already identified a specific proposal which it wishes to develop. What the Treasury does not currently do is to involve stakeholders one stage earlier. As the Government has consistently refused to countenance the option of a Green Tax Commission, the Treasury should involve stakeholders in systematically identifying possible areas where environmental tax proposals could be developed. To provide public accountability for such an approach and a strategy to support the Statement of Intent, it should publish a short annual report setting out the key issues arising from stakeholder dialogues, the outcomes of research undertaken, and its proposals for the future.

42. As we concluded earlier, progress on environmental taxation has at present stalled—largely due to the considerable opposition to its environmental reforms which the Government has faced from industry, business, and even at times environmental organisations. If the Government is to regain the initiative on environmental tax reform, it will need to make a convincing case for the benefits of such a strategy. Increased environmental awareness and understanding among the public will be crucial. The increased use of hypothecation might also help to make environmental taxes and escalators more politically acceptable. As we have pointed out before, leadership is crucial, and we believe that there is much more the Treasury and the Chancellor could do to promote this agenda.

Appraisal of budgetary measures

43. We noted that the previous Financial Secretary did not address an important issue which we raised in our previous report on PreBudget 2000—namely, that the Government had failed to carry out a comprehensive evaluation of the environmental impact of the £1.7 billion handout to road users, but had only sought to evaluate a few specific measures.[47] The Treasury's supplementary memorandum acknowledges the absence of an environmental appraisal of the total effect of the reduction in fuel duties and VED, and goes on to say that this would be impossible to calculate.[48]

44. We are concerned at the extent to which table 7.2 (previously table 6.2) of the PreBudget Report 2001 still fails to capture comprehensively the impact even of environmental measures—let alone the 'mainstream' measures contained in earlier chapters. We recommend that the Treasury provides a detailed environmental appraisal as a supporting document for all future Pre-Budget Reports. This should set out in more detail the basis for the summary appraisal figures included in the main report, and the methodology and assumptions used to calculate them. It should also contain an analysis of any other measures (or combinations of measures) in the Pre-Budget Report which the Treasury believes may have significant environmental impact but which it has been unable to calculate.

45. There are longstanding recommendations from previous reports that the Government should incorporate ex post appraisals of measures in the PBR, to evaluate the effectiveness of measures it has introduced and build up data over time.[49] Indeed, the Government in its response to our Budget 1999 report stated that it would do so on an annual basis.[50] In March 2001, Mr Timms again acknowledged that the development of appraisal and monitoring of fiscal measures was becoming increasingly important and that we could expect to see progress in this area.[51] We recommend that the Government should fulfill its commitment to incorporate systematic ex post appraisals within future PreBudget Reports. Data should be incorporated in summary form within the PBR, and supported by more detailed information in supporting the environmental appraisal document we have recommended above.

46. We do acknowledge the difficulties involved in monitoring the effectiveness of policy instruments, especially where a number of policy instruments may have similar impacts. DEFRA has admitted it will not be in a position to assess whether reductions in CO₂ emissions are due to emissions trading, Integrated Pollution, Prevention and Control, or the Climate Change Levy negotiated agreements.[52] But the implications of this are considerable. The Government has frequently stated in relation to an environmental tax strategy that it will use the most appropriate policy mechanism (whether fiscal, regulatory, or voluntary) on a case by case basis. We find it difficult to understand how the Government can decide what is the most appropriate policy mechanism, if it is not able to assess the effect of different policy instruments. We urge the Government to clarify how it proposes to develop appraisal and monitoring systems on a more comprehensive basis.

Resource Productivity

47. As a result of recommendations made by the Environmental Audit Committee in the last Parliament, the PreBudget Report 2001 now contains much more information on environmental impacts in a dedicated chapter on environmental measures. However, earlier chapters of the Pre-Budget Report 2001 are dominated by the discussion of economic and social issues: environmental and resource productivity hardly feature here. It is interesting to note that the Treasury's ability to highlight a productivity gap compared with major competitors, and the emphasis now placed upon this in these main chapters, is only because of the availability of relevant data. There is a clear need to develop a similar analysis of resource productivity.

48. Progress in this area has been relatively slow, and only in the energy sector are some resource productivity indicators currently well established. Much was expected from the DTI's Sustainable Development Strategy (published in November 2000), yet while this was strong on the aims and objectives of developing resource productivity indicators, it contributed little to practical progress. Meanwhile, DEFRA has commissioned the Wuppertal Institute in Germany to carry out a study to develop data sets on which resource indicators could be based. The Office for National Statistics has also been carrying out a limited amount of work in this area.[53] More recently, PIU has published a report on this subject. The objective of this study was to provide a framework for the practical introduction of resource productivity indicators.[54]

49. We are disappointed that the recent PIU report does not take us much further forward. In our view, there is little in it which could not have been written several years ago. We are also disappointed at the very slow pace of development in this area and the apparent lack of clear lead responsibility. It contrasts with the optimism expressed by Rt Hon. Patricia Hewitt MP, Secretary of State for Trade and Industry on this score.[55] We are also disappointed that the Treasury itself, together with the Office for National Statistics (a department and agency of the Treasury), has not pursued a more active role in developing resource productivity indicators and incorporating these into the PreBudget Report. This is an issue which we may well wish to return to in more detail in due course.

39 Pre-Budget Report 2000, Cm 4917, November 2000, para 6.13. See also Ev. 10, response to questions 1 and 2, where the Treasury fails to address adequately EAC's concerns on this point. Back

40 HC 363-i, pp. 10; 19. Back

41 HC 333-i, Session 2000-01, QQ. 98-99. It is worth noting that the Treasury did not specifically admit to the fact that the "shifting the burden" target had been dropped even in their supplementary memorandum (p. 17). Their response actually suggests that they do not see "shifting the burden" as a strategic priority. Back

42 Q. 97. Back

43 QQ. 123-126. Back

44 Ev. 14. Back

45 QQ. 122; 125-126. Back

46 Q. 122. Back

47 Second Report from the EAC, on The Pre-Budget Report 2000: Fuelling the Debate, HC 71, paras 81-82. See also HC 333-i, Q. 4. Back

48 HC 333-i, Session 2000-01, p. 18 (question 3). Back

49 Eighth Report from the EAC, Session 1998-99, on The Budget 1999: Environmental Implications, HC 326, paras 65-73; 80. Back

50 Fourth Report from the EAC, Session 1999-2000, on The Pre-Budget Report 1999, HC 76, p. xlvii. Back