Memorandum from HM Treasury
This memorandum responds to the request for
information from the Environmental Audit Committee, following
up the evidence provided by the Financial Secretary on 14 March
2001 (Environmental Audit Committee, Minutes of Evidence, HC 3331-i,
2000-01). The Committee's questions are shown in italics below.
1. In discussing whether or not the Treasury's
tax strategy was ad hoc, Mr Timms referred to the principles set
out in the 1997 Statement of Intent. But would the Treasury agree
that these principles themselves do not constitute a strategy?
Would the Treasury also like to comment on the difference in wording
between the 1997 Statement and the reworking of it in the 1999
Pre-Budget Report. The former states that "over time, the
Government will aim to reform the tax system . . .", whereas
the latter states that ". . . the Government will consider
using the tax system...on a case by case basis." Does not
the wording of the latter suggest that the Treasury's strategy
is indeed somewhat ad hoc?
The Government remains committed to the principles
set out in the 1997 Statement of Intent on environmental taxation.
These principles were reiterated in the 1999 Pre-Budget Report.
In aiming to reform the tax system to deliver environmental benefits
the Government will consider each potential opportunity on a case
by case basis, taking account of its wider economic and social
objectives. The 1999 Pre-Budget Report also noted that taxation
could have a role to play alongside other policies such as trading,
local charging, public spending, regulation and education. There
is no inconsistency between these objectives: in seeking to move
the burden of tax from "goods" such as labour and capital
to "bads" such as pollution the Government needs to
consider whether each potential tax change meets the tests of
good taxation; and whether it would be complementary to other
policy measures. The responses to specific environmental issues
will vary according to their nature, but the principles underlying
the responses will be the same.
2. In the Statement of Intent the Treasury
stated that the Government "will explore the scope for using
the tax system to deliver environmental objectives as one instrument
in combination with others." Has the Treasure carried out
any research in support of this assertion to identify environmentally
harmful activities and the scope for introducing and extending
environmental taxes in terms of the areas and sectors of economic
activity they cover?
The Government's strategy for tackling threats
to the environment and the quality of life is set out in the documentation
for Budget 2001. The Government has introduced a range of measures
to address these threats under the themes of tackling climate
change and improving air quality; regenerating Britain's towns
and cities; and protecting Britain's countryside. The Government
continues to review options for introducing and extending environmental
taxes in each of these areas. The introduction of the aggregates
levy has, for example, been based on detailed research. It should
also be noted that research on environmental matters is carried
out by a range of Government departments including DEFRA, DTLR,
DTI and Revenue Departments.
3. Mr Timms referred to the fact that any
major change in the perverse VAT incentives favouring greenfield
development would require a lot detailed research on the likely
social, economic and environmental impact of such a move. Is this
not precisely the kind of work the Treasury should be doing to
construct an environmental tax strategy? Why has the Treasury
not been carrying out this research?
Currently most repairs to homes are subject
to VAT at 17.5 per cent and the sale of a new house is zero rated.
Lord Rogers, in his report Towards an Urban Renaissance, suggested
that the rate of VAT on new build and on repairs be harmonised
at a reduced rate.
In Budget 2001 the Government announced a reduced
rate of 5 per cent for some specific conversion and renovation
services (for example, the renovation of a dwelling that had been
empty for three years) based on analysis carried out by HM Customs
The Treasury and Revenue Departments continue
to carry out research into the likely social, economic and environmental
effects of a range of measures which could form part of the Government's
4. Does the Treasury have any strategy for
greening the Corporation tax system beyond the introduction of
enhanced capital allowances funded from the Climate Change Levy?
If not, is the Treasury carrying out any research in this area?
The Government recognises that many environmental
improvements by business require investment and it believes that
there is a case for extending the availability of enhanced capital
allowances to include certain other environmental objectives and
other technologies. In Budget 2001 the Government therefore announced
proposals for setting up a Green Technology Challenge, with the
intention of offering enhanced first year capital allowances for
further environmental objectives and new technologies. The Government
carried out a consultation on the environmental areas and technologies
which could form the priorities for this scheme during summer
2001. The consultation has recently closed and the results are
currently being considered. Furthermore, for example, the Government
has recently introduced 100 per cent enhanced capital allowances
for owners and occupiers for creating flats over shops and similar
commercial premises for letting, and it has introduced a 150 per
cent accelerated payable tax credit for owners and investors for
the costs they incur in cleaning up contaminated land.
5. Mr Timms referred on a number of occasions
to the increasing need to put in place monitoring mechanisms to
assess the effectiveness of the environmental measures which the
Government had now put in place. What specific mechanisms does
Mr Timms have in mind, and when will the Treasury set out what
it plans in this area?
[This response also addresses points 9 and 10
raised by the committee]
9. In modelling environmental impacts,
has the Treasury attempted to assess fuel duty reductions and
reductions on lorry VED in a holistic way, given the fact that
the combined impact of both measures may stimulate more road use
than appraisals of each measure separately might suggest?
10. Mr Timms referred to the fact that
IR had done a good deal of work to plan how we can see whether
the million tonnes of carbon emissions reduction that we expect
from changes in company car taxation is actually being achieved.
The environmental and regulatory impact assessment only includes
two lines on this subject. To what is the Financial Secretary
The Government remains committed to evaluating
and appraising the impact of environmental tax measures. The results
are given in table 6.2 of the Budget document.
In assessing the impacts of particular policy
it is essential to draw out the impacts of individual policies
set against a background of business as usual. If there is a case
where a package of measures are presented, such as the landfill
tax and the landfill tax credit scheme, impacts are considered
Specifically, on the subject of company car
taxation, the Inland Revenue is planning to evaluate extensively
the outcomes of the reforms to company car taxation from 2002-03
onwards under which tax paid will depend on cars' carbon dioxide
emissions. The Inland Revenue will analyse the data from tax returns
to see how the numbers and types of company cars change over time.
It will also commission surveys of employers and employees and
do economic modelling work to help with the evaluation process.
6. The Treasury's aims and objectives do
not contain any reference to environmental protection and sustainable
development. Does the Treasury accept that the phrase "sustainable
growth" will be widely understood in economic termsparticularly
when the Treasury's overall target is to raise by 2004 the trend
rate of growth from the current estimate of 2.5 per centand
that it would now be appropriate to amend the aim to refer specifically
to "sustainable development"?
The Treasury's aim, reflecting the Government's
primary economic objective, is to raise the rate of sustainable
growth. Progress against this aim will be measured by looking
at rates of economic growth. However, it has been made clear,
for instance in recent Budget and Pre-Budget Reports, that economic
growth must be sustainable in social and environmental terms too.
7. Mr Timms acknowledged that the Climate
Change Levy and other taxes were to be revenue neutral. If they
are so, the percentage of taxes from environmental measures will
increase. Is it not inconsistent therefore for Mr Timms to be
reluctant to accept this as a measure?
No. The Government does not believe that it
is sensible to measure the effectiveness of environmental taxes
simply in terms of the proportion of revenues which they generate.
Such a measure would, for example, not record the effects of tax
incentives such as enhanced capital allowances or incentives to
encourage the use of greener fuels. In addition, the revenue from
successful environmental taxes can be expected to decline over
time if they change behaviour.
8. Why has the Treasury no discussed eco-efficiency
in chapter 3 of the Budget Report or in the accompanying budget
documentation and supplementary report on productivity? Does this
not represent a significant missed opportunity, following the
much-heralded DTI sustainable development strategy?
All Budget measures are worked up within the
Government's sustainable development strategy. However, to provide
a coherent environmental analysis of the Budget, significant environmental
impacts associated with any policy are considered in chapter 6
and in the environmental appraisal table, rather than in the individual
9. In modelling environmental impacts, has
the Treasury attempted to assess fuel duty reductions and reductions
on lorry VED in a holistic way, given the fact that the combined
impact of both measures may stimulate more road use than appraisals
of each measure separately might suggest?
Please see response to point 5.
10. Mr Timms referred to the fact that IR
had done a good deal of work to plan how we can see whether the
million tonnes of carbon emissions reduction that we expect from
changes in company car taxation is actually being achieved. The
environmental and regulatory impact assessment only includes two
lines on this subject. To what is the Financial Secretary referring?
Please see response to point 5.
11. The Financial Secretary made reference
to the fact that negotiations with the European Commission for
state aids were focusing on a 10 year period. Does the Treasury
therefore anticipate that existing 80 per cent rebates for negotiated
agreement holders will terminate in 2011?
The European Commission has approved the 80
per cent discount for energy-intensive sectors of industry which
have agreed to meet energy-saving targets for a period of 10 years.
There are currently no plans for how the Climate Change Negotiated
Agreement Scheme might be developed or extended beyond 2011. The
Government would anticipate that such decisions would be made
closer to the time, in the context of circumstances at that time.
12. How many companies does the Treasury
expect to join the Emissions Trading Scheme during the first year
The emissions trading scheme is the responsibility
There are two ways in which firms can enter
into the UK Emissions Trading Scheme. The first is through a Climate
Change Levy Negotiated Agreement, where firms can opt to trade
to meet their first emissions targets at the end of 2002. Approximately
13,000 individual facilities are covered by these agreements.
The second way a firm can enter into the scheme is to decide to
take part in the proposed January 2002 auction process. Firms
have until the end of December to register an interest in joining
the scheme. It is not possible to tell, at this stage, the total
number that will volunteer into the scheme. Working closely with
a wide range of businesses, the Emissions Trading Scheme has been
designed to be accessible to as wide a constituency as possible,
so as to give as many UK firms as possible valuable early experience
of emissions trading. But the success of the scheme will be judged
on whether it delivers a well-functioning market rather than any
particular number of participants.
13. Will the £30 million to be made
available in 2003-04 for the Emissions Trading Scheme be restricted
to those companies which join in the first year?
The emissions trading scheme is the responsibility
of DEFRA. The £30 million (after corporation tax) available
from 2003-04 will be available to firms joining in the first year
of the Emissions Trading Scheme. Decisions on funding for firms
entering into the scheme subsequent to the first year will be
taken in the next Spending Review in the light of experience of
the first year of trading.
14. What monitoring did the Treasury carry
out in the course of Spending Review 2000 and before PSAs were
drafted to ensure that departments were building environmental
protection and sustainable development into their reviews? How
did the Treasury, for example, ensure that environmental considerations
were adequately built into the Department of Health's review and
the work of the NHS?
The integration of sustainable development into
SR2000 was discussed several times at meetings of Green Ministers,
including the requirement for Green Ministers to be involved in
their department's preparation and conduct of the Review. Treasury
Ministers wrote to and spoke to colleagues on a number of other
occasions to emphasise the importance of sustainable development
in the Review.
The guidance circulated to departments also
made clear the need both to build sustainable development into
the Review. As the Review progressed, and as PSAs were drafted,
Treasury officials kept under close review the coverage of sustainable
development issues and the headline indicators of sustainable
development. It should be noted that it is for each department
to ensure that environmental considerations are built into their
15. The pro forma for SDAs which departments
were obliged to complete includes standard sections onfor
exampleprocurement, fraud, consumer aspects, sickness absence
and electronic government. Why was a section on Greening Government
The wide range of Greening Government issues
are best covered in the annual reports of the Green Ministers
Committee, which have become a well-established vehicle for reporting
environmental performance across Government departments, including
against Government-wide targets.
The Green Ministers Report gives a much fuller
picture of the wide range of issues covered by "Greening
Government" than would have been possible in Service Delivery
Agreements, and any material in departmental SDAs would have been
overtaken relatively quickly by the next Green Ministers Report.
16. The joint DETR/Treasury note on procurement
requires decisions to be based on whole life costs and refers
to the UK's domestic policy of not using procurement to achieve
other policy ends. How does the policy of purchasing wood from
environmentally sound origins fit in with this guidance? Can the
purchase of such wood be justified in terms of whole-life costs?
If not, on what basis can it be justified?
There is no conflict between the guidance set
out in the Joint Treasury/DETR note and the timber procurement
Paragraph 2 of the joint note explains that
the definition of value for money, under the Government's procurement
policy, is "the optimum combination of whole life cost and
quality to meet the user requirement". This means that, in
all cases, contracts must be awarded to the bidder who provides
the best combination of whole life costs and quality in meeting
whatever the user's requirement or specification happens to be.
The requirement, or specification, is a matter
for the contracting authority. It can specify its requirements
in green terms, in line with its environmental strategy or wider
Government environmental policy. Such strategies and policies
will take account of economic arguments related to sustainability.
It will then be a matter of accepting the bid which offers the
best whole life cost/quality combination in meeting that "green"
requirement or specification.
Paragraph 7 of the joint note explains this
further. It states that: "In preparing the specification
the end user should decide the extent to which it should cover
environmental requirements, taking account of the Government's
environmental policies and the department's own strategy for greening
its operations." Paragraph 12 is also relevant. It states
that "The justification (for extra cost) might be that Ministers
have decided collectively as a matter of policy that the Government
should not buy a particular substance or material on the grounds
that it is harmful to the environment."
Of course, this does not mean that, in specifying
requirements, costs and affordability issues are not relevant.
It is simply that these are matters for Departments to consider,
in the light of their "green" and other policy commitments.
In the case of timber, it has been decided,
as announced in the Parliamentary answer by Michael Meacher of
28 July 2000, that, as a matter of environmental policy, all Government
Departments and their agencies are now required actively to seek
to buy timber and timber-related products from sustainable and
legal sources. Departments will need to take this requirement
into account in specifying relevant requirements. They will then,
as usual, award their contracts to the bidders whose bids provide
best value for money in meeting those requirements.
The issue about not using procurement to pursue
other aims is not meant to cover legitimate use of specifications
which are relevant to the performance of the contract. The concern
is with attempts to use procurement to take account of a contractor's
policies or initiatives which are not relevant to the performance
of the contract and which distort the process of choosing the
bid which combines the optimum combination of whole life cost