FOURTH REPORT
The Environmental Audit Committee has agreed to
the following Report:
PRE-BUDGET REPORT 2002: TAX AND THE ENVIRONMENT
LIST
OF RECOMMENDATIONS AND CONCLUSIONS
Overview
1. Pre-Budget 2002 introduced a number of measures
in terms of environmental tax policy—an increase in the
Landfill Tax escalator, the reform and replacement of the Landfill
Tax Credit Scheme, and a proposed cut in bioethanol duty.
However, these hardly constitute major initiatives, and this
reinforces the impression that the Treasury's strategic objective
of shifting the burden of taxation from 'goods' to 'bads' is in
danger of stalling. Indeed, we see little evidence of an
environmental tax strategy as such (para 5).
Specific fiscal issues
2. We strongly feel that the Treasury could do
far more to set out a coherent, long-term strategy for fuel duties,
and demonstrate how the current incentives for biofuels, road
fuel gases (eg LPG), and hydrogen fit into this. If biofuels are
to play a role, the Treasury should also set specific targets
for take-up by which the effectiveness of its fiscal strategy
can be judged—before the EU forces us to do so (para 16).
3. It will take at least nine years for the Landfill
Tax to reach £35 per tonne— widely seen as the minimum
level required to stimulate significant changes in behaviour.
We recommend that the Treasury increases the rate of Landfill
Tax more steeply than is currently proposed, so as to reach this
level in a much shorter period of time (para 19).
4. Our suspicion remains that the Government saw
reducing the Landfill Tax Credits Scheme as a way of obtaining
finance for strategic central initiatives for which it would otherwise
have had to find additional funding. We are also amazed that—after
such a protracted course of deliberation and consultation—the
Government has not made available any information about the public
spending programme which will largely replace it (para 25).
5. The Treasury must clarify its position on VAT
with regard to energy efficiency products in the light of our
concerns and the legal precedent which the Association for the
Conservation of Energy has cited (para 29).
6. We recommend that the Treasury immediately
institutes research into the present perverse taxation of building
on brownfield and greenfield sites, and publishes the results
(para 31).
7. The Government's Climate Change Strategy for
reducing greenhouse gases is seriously off-course, and current
progress and future projections must be reviewed as a matter of
urgency. There is clearly a need for fiscal instruments to play
a greater part in bringing carbon reductions back on track, and
the Treasury must set out how it proposes to achieve this (para
34).
8. We are astonished by the views the Secretary
of State for Transport has recently expressed in relation to the
environmental impacts of aviation; and by his disregard for joined-up
government and the manner in which he has attempted to pre-empt
the Treasury consultation on this issue. His comments demonstrate
a failure in the mechanisms which the Government has put in place
to embed sustainable development at its heart, and are particularly
surprising in view of the great emphasis the Prime Minister placed
on environmental objectives in his recent speech (para 39).
9. Progress on developing fiscal instruments,
in particular to reduce fertiliser use, has been very slow and
the Treasury—in conjunction with DEFRA—needs to address
this urgently. The Treasury should utilise the revenues from such
sources to provide matching funding for environmental land-management
schemes, exploiting the opportunity offered in this respect by
recent reforms of the Common Agricultural Policy (para 43).
The Treasury's review of its environmental
tax strategy
10. While the Treasury's review of its environmental
tax strategy is welcome, we question the process by which the
review was conducted and its outcome. In particular:
— no terms of reference were formally
set, and the review was conducted in relative secrecy;
— Tax and the Environment
is to be the only output from the review. Yet this document is
not a strategy, and it fails to spell out how the Treasury is
to shift the burden of taxation from 'goods' to 'bads';
— While the Treasury's latest Public
Service Agreement now includes an environmental objective, no
targets have been set for it; and
— A strategy also requires a mechanism
for regularly evaluating and monitoring progress, and the Treasury
should produce an annual report to do so (para 52).
11. In placing such emphasis on a formal set of
criteria for environmental taxation and the development of proposed
environmental taxes, the Government has now effectively put in
place a more stringent regime than exists in any other area of
taxation. Our concern is that these criteria may act as barriers
to the introduction of further environmental taxes. Indeed, we
are entitled to ask what criteria govern other tax regimes, and
what overall balance which the Government seeks to achieve between
different tax regimes such as income tax, property taxes, and
National Insurance. Where are the formal documented tax strategies
which underpin these? (para 55).
12. Environmental taxes still raise very little
money. It is our belief that, if the huge scale of the environmental
challenges facing us are to be addressed, environmental taxes
and fiscal incentives will need to play a far larger part than
they currently do. Our own view is that the Government should
use such instruments flexibly to support environmental policy
objectives, targets, and standards; and use monetary valuation
only where it can credibly capture the major costs and benefits
(para 62).
13. There can be little doubt that the UK's present
use of material resources is unsustainable, and the choice of
resource productivity indicators must adequately reflect this.
Resource productivity issues should be as prominent in the
Pre-Budget Report as labour or economic productivity. We consider
that the Treasury should be playing a much more active role in
pushing forward development in this area (para 68).
Spending Review 2002
14. We are concerned that economic and social
objectives are reflected in departmental Public Service Agreement
targets, whereas environmental objectives are not (para 74).
Conclusion
15. The scale of environmental challenges facing
the developed world is daunting. Fiscal policies can play an important
role in altering over time both values and behaviour. In our view,
the Treasury have set an excellent objective—over time,
to reform the tax system to increase incentives to reduce environmental
damage—but have yet to back this up with an adequate strategy.
We hope that they will take full account of our comments and recommendations,
and that the Government will display greater commitment in taking
this agenda forward (para 76).
PREBUDGET REPORT 2002
INTRODUCTION
1. Since its inception in 1997, the Environmental
Audit Committee has regularly reviewed the progress made by the
Treasury in placing environmental objectives at the heart of its
fiscal policies.[1] In
doing so, we have taken as one of our reference points the Statement
of Intent on Environmental Taxation, which the Treasury itself
released in July 1997.[2]
This stated that the Government would "over time...reform
the tax system to increase incentives to reduce environmental
damage."
2. Just over a year ago, in Pre-Budget Report
2001: A New Agenda? (January 2002), we took stock of
the overall progress against this agenda which the Government
had made in its first term and the prospects for the future.[3]
One of our main conclusions was that, while the Treasury had an
overall objective, it still had no clear strategy for pursuing
it; and we suggested specific ways in which this could be improved.
We are disappointed at the negative and protective nature of the
Treasury's response.[4]
In this report, we examine the latest Pre-Budget Report, published
in November 2002, and comment on issues arising from that response.[5]
3. We received a number of written submissions—particularly
on fuel duty in relation to bioethanol and biodiesel.[6]
We also received a memorandum from the Treasury providing more
information on Spending Review 2002,[7]
following the blanket refusal we had encountered when we wrote
to each department to request copies of their Sustainable Development
Reports—a refusal to which we drew the House's attention
in our recent Annual Report.[8]
Following a change in ministerial portfolios within the Treasury
in 2002, responsibility for environmental tax and fiscal measures
was transferred from the Financial Secretary to the Economic Secretary.
We accordingly took evidence from the Economic Secretary on 11
December 2002.[9] We subsequently
requested a supplementary memorandum from the Treasury in response
to other queries and questions arising from the evidence the Economic
Secretary had given.[10]
Pre-Budget 2002: overview
4. From the perspective of sustainable development
and the environment, Pre-Budget Report 2002 (PBR 2002) introduced
several new measures or proposals:
- a commitment to increase the Landfill Tax escalator.
The rate of Landfill Tax will rise by £3 from 2005-06, and
rates will increase by at least £3 per tonne in each subsequent
year to reach £35 in the medium to long term. The Government
will consult on the detail of the increase.[11]
- reform and replacement of the Landfill Tax Credit
Scheme (LTCS). The existing LTCS will be cut by about two-thirds
(from £147 million to £47 million), and the extra £100
million of tax receipts will be used to finance a waste management
public spending programme, details of which have not yet been
announced.[12]
- a proposal to introduce a 20p per litre duty
cut for bioethanol in order to help the UK benefit from the reduction
in greenhouse gases and local polluting effects that the use of
this fuel can offer. The timing of this measure will be subject
to consultation with the industry.[13]
5. Pre-Budget 2002 introduced a number of measures
in terms of environmental tax policy—an increase in the
Landfill Tax escalator, the reform and replacement of the Landfill
Tax Credit Scheme, and a proposed cut in bioethanol duty.
However, these hardly constitute major initiatives, and this
reinforces the impression that the Treasury's strategic objective
of shifting the burden of taxation from 'goods' to 'bads' is in
danger of stalling. Indeed, we see little evidence of an
environmental tax strategy as such.
Specific fiscal issues
Fuel duty strategy
6. For many years, the Treasury has pursued
an incremental approach to fuel duty changes. By introducing relatively
small differentials in duty between different sorts of fuel, for
example, it has successfully shifted consumption to lead-free
petrol and subsequently to ultra-low sulphur petrol, with associated
benefits to air quality.
7. However, there are limits to the extent to which
an incremental strategy can really produce a major shift to alternative
fuels. In recognition of this, the Government has also provided
very significant reductions for certain fuels—in particular
liquid petroleum gas—
on the grounds of their environmental benefits. A
similar strategy is being pursued with regard to biofuels, with
a reduction in duty of 20p per litre for biodiesel introduced
in Budget 2002 and proposals for a similar reduction for bioethanol
in PBR 2002. Budget 2002 also introduced a zero duty level for
hydrogen, together with Enhanced Capital Allowances (ECAs) to
stimulate investment in a new fuel infrastructure.
8. The graph below graphically sets out changes in
the levels of duty for different fuels since 1991. It visibly
demonstrates the effect of abandoning the Fuel Duty Escalator
in 2000, and it also shows how duty on road fuel gases, in particular
Liquid Petroleum Gas (LPG), has been successively reduced until
it is now some 40p per litre less than ordinary fuels. Indeed,
LPG is 17p per litre lower than even biodiesel—despite the
sharp reduction in the latter following Budget 2002.
9. In considering the Treasury's strategy, our concern
is that the differentials between different fuels do not seem
to be based on a clear, long-term strategy reflecting environmental
objectives and anticipated environmental benefits. While we fully
accept that LPG offers some environmental benefits, biofuels would
appear to offer substantially more. British Sugar have argued
strongly that the 20p reduction is insufficient to stimulate a
market for biofuels.[14]
Most European states offer substantially greater duty reductions
for biofuels than does the UK.[15]
Indeed, comparative figures for consumption by type of fuel show
how ineffective the UK has been at stimulating a market even in
LPG, let alone biofuels.[16]
Cargill drew our attention to EU proposals to establish a minimum
level of biofuels as a proportion of total fuels sold, beginning
with a level of 2% in 2005 and rising to 5.75% by 2010.[17]
Other EU states are already exploiting biofuels as a medium term
strategy to fulfil a number of objectives. We are disappointed
that the UK is doing so little, and that last year's strategy
document, Powering Future Vehicles, had so little to say
on this issue.[18]
Source: Customs and Excise[19]
10. We questioned the Economic Secretary on the level
of biofuel duty. He suggested that the "dynamics for the
intervention that we believe we need to make in the case of bioethanol
or biodiesel is different from that of the fuel gases (ie LPG)".[20]
We found his comments arcane, and requested further information
on the extent to which the Treasury had carried out a comparative
appraisal of the costs and benefits of different fuels. In its
supplementary memorandum, the Treasury provided two different
appraisals:
- a non-monetarised comparative appraisal of environmental
costs and benefits of all fuels; [21]
and
- a monetarised appraisal of the benefits of bioethanol
and biodiesel (based on the value of carbon, NOx, and particulate
emissions) in relation to ULSP.[22]
11. The Treasury went on to argue that the monetarised
benefit of bioethanol only amounted to a maximum of 5p per litre
compared to ULSP, whereas they were now offering a cut of 20p
a litre in duty.[23]
We are concerned not only over the basis of such environmental
costings but also at their selective use. The Treasury has not,
for example, provided us with a similar costing exercise for LPG.
Moreover, the Treasury's argument appears to be at variance with
the non-monetarised comparative appraisal table it provided and
which we reproduce below. The table shows that biofuels, with
a positive overall score of +6 are far more environmentally friendly
than LPG which scores only +1, and indeed rank only just behind
hydrogen which scores +7.
Environmental evaluation of road transport
fuels
FUEL
|
Lifecycle CO2
|
Local Air Quality
|
Noise
|
Waste Policy
|
Health and Safety
|
Vehicle/Engine Perfomance
|
Fuel Security
|
Total Score
|
Fuel Duty Rate (ppl)
|
ULSP
|
O
|
O
|
O
|
O
|
O
|
O
|
O
|
O
|
45.82
|
ULSD
|
O
|
O
|
O
|
O
|
O
|
O
|
O
|
O
|
45.82
|
LPG (v ULSP)
|
+
|
O
|
O
|
O
|
O
|
O
|
O
|
1
|
9
|
LPG (v ULSD)
|
-
|
+
|
+
|
O
|
O
|
O
|
O
|
1
|
9
|
NG
|
O
|
++
|
++
|
O
|
O
|
O
|
+
|
5
|
9
|
Biodiesel
|
++
|
O
|
O
|
++
|
+
|
O
|
+
|
6
|
25.82
|
Bioethanol
|
++
|
+
|
O
|
++
|
O
|
O
|
+
|
6
|
25.82
|
Hydrogen
|
+
|
++
|
++
|
+
|
-
|
+
|
+
|
7
|
0
|
Methanol
|
+
|
+
|
O
|
+
|
-
|
O
|
+
|
3
|
0
|
Biogas
|
++
|
++
|
++
|
+
|
O
|
O
|
+
|
8
|
0
|
Source: Treasury supplementary memorandum to the Environmental
Audit Committee, Ev 29, 34-35.
12. The current differentials between unleaded petrol, LPG, and
biofuels do not reflect their relative environmental benefits,
and the separate monetary and environmental appraisals provided
by the Treasury are inconsistent with each other in relation to
the relative levels of duty on bioethanol and LPG. In addition,
the monetary appraisal of bioethanol appears to understate significantly
the contribution which it could make towards reducing carbon emissions.
13. The Government is clearly facing difficult issues in developing
a fuel duty strategy. Promotion of biofuels could provide huge
benefits in carbon savings, and indeed a recent report has suggested
that a quarter of the UK's agricultural land could in principle
provide sufficient biofuel to satisfy total transport demand.[24]
On the other hand, it is unclear what the infrastructure requirements
would be and to what extent the latter would be compatible with
the infrastructure required for a longer-term shift to hydrogen-based
transport. The role of LPG and Compressed Natural Gas (CNG) in
all this—and the extent to which they should be further
promoted—is unclear. And finally, the impact on government
revenues has to be taken into account. We do not pretend that
the task is easy.
14. We are also concerned, in this context, at a certain tension
between the Treasury's traditional desire for secrecy in relation
to tax changes, and its new-found zeal for consultation and long-term
signals. We asked the Economic Secretary, for example, whether
the Government had appraised the benefits of a hypothecated, real
terms increase in fuel duties. He hid behind the traditional veil
of arguing that duty rates would be decided by the Chancellor
in the Budget.[25] Yet
where the Government wishes to, as in the case of LPG and hydrogen,
it is ready to offer longer-term commitments.
15. Indeed, the Treasury's approach to LPG is particularly interesting
in this respect. In recent years it has signalled its intention
to continue to provide significant duty reductions for this fuel,
and there is some evidence that this is now beginning to have
some impact. But the Government's commitment not to increase rates
of duty only extends to 2004.[26]
This creates doubt in industry and among the public as to what
the Government's long-term intentions are, and investment in LPG
conversion may therefore suffer. While we realise that LPG does
not provide a final solution, we think that it is nonetheless
important for the Treasury to give a clear indication of future
strategy with regard to duty levels in relation to other fuels.
The case of LPG highlights the more general need for the Treasury's
fiscal strategy to give clear long term signals based on environmental
objectives.
16. We strongly feel that the Treasury could do far more to
set out a coherent, long-term strategy for fuel duties, and demonstrate
how the current incentives for biofuels, road fuel gases (eg LPG),
and hydrogen fit into this. If biofuels are to play a role, the
Treasury should also set specific targets for take-up by which
the effectiveness of its fiscal strategy can be judged—before
the EU forces us to do so.
.
Landfill Tax escalator
17. The rate of Landfill Tax is currently set at £13
per tonne for active waste (2002-03). There is a £1 a year
escalator in place which will increase the rate to £15 in
200405. The PreBudget Report includes a commitment
to increase the escalator to £3 a tonne in 200506,
and to at least £3 a tonne in subsequent years, on the way
to a "medium to longterm" rate of £35
per tonne.[27]
18. Our concern is that such an approach—based on slow incremental
change—is excessively cautious, and may not stimulate the
investment and step change in behaviour that is required. The
Environmental Audit Committee and the Environment, Food and Rural
Affairs Committee are both conducting parallel and coordinated
inquiries on aspects of the Government's waste strategy, and will
report soon. We have therefore kept to a minimum discussion of
these issues in this report. But, with respect to the Treasury's
proposals, we have received considerable evidence that the private
sector is willing to invest substantial sums of money in developing
alternative and 'higher tech' approaches to waste management,
but that it will only do so if the Government sets out a clear,
longterm strategy which would make it profitable for the
companies concerned.[28]
19. It will take at least nine years for the Landfill Tax to
reach £35 per tonne— widely seen as the minimum level
required to stimulate significant changes in behaviour. We recommend
that the Treasury increases the rate of Landfill Tax more steeply
than is currently proposed, so as to reach this level in a much
shorter period of time.
20. We welcome the fact that HM Customs and Excise appear to have
given some consideration to a possible incinerator tax, but are
somewhat baffled by their conclusion that "there is no value
in pursuing (possible design options for a tax) further in advance
of a decision on how a possible tax or other economic instrument
might be structured".[29]
The Economic Secretary told us that further policy development
will need to await the review of the environmental and health
effects of all waste management and disposal options.[30]
Progress since the Waste Strategy appears to have been plagued
by consistent delays, and it disappointing that this further review—as
necessary as it may be—will simply postpone key Government
decisions still further.
21. The Treasury's decision to rack up the rate of Landfill Tax
is likely to increase the pressure on local authorities to go
for the next cheapest option—incineration—even though
it is well down the Government's waste hierarchy. We could therefore
become locked into such an approach before the Government has
decided whether incineration should play a major role in its waste
strategy. The need to carry out a review of disposal options will
lead to further delay and exacerbate this situation.
Landfill Tax Credits Scheme
22. Under the LTCS, firms liable to the Landfill Tax can
claim a certain level of exemption for financing waste-related
projects at a local level. In 2002-03, the tax credits in will
amount to £147 million. PBR 2002 announced a major reform
to the scheme. The existing LTCS will be severely reduced in scope
to £47 million—only a third of the current level.[31]
The remainder, £100 million in 2003-04 rising to £110
million in the two subsequent years, will be allocated to a public
spending programme to encourage sustainable waste management.
We note that the Strategy Unit report on waste—which the
Government has yet to respond to—recommended such a change.[32]
23. We have ourselves questioned successive Treasury Ministers
on the LTCS. One issue which concerns us is why it has taken so
long for the Government to carry out this reform. The Treasury
initially consulted on a possible reform in 2000, and in March
2001 Stephen Timms told us that "(the consultation process)
had led us to the conclusion that we would wish in due course
to replace the LTCS, either in whole or in part, with a public
spending programme, but there is a good deal more work to be done...about
how we take that forward".[33]
Yet, in the very same session, the Financial Secretary told us
that he was proposing to set new targets for raising the percentage
of tax credits going to sustainable waste management projects,[34]
and the Government did indeed set new targets in May 2001.[35]
24. Similarly, Paul Boateng told us in December 2001 that he found
the LTCS attractive as it was empowering and enabling of local
communities. Yet at the same time—and before the industry
had really had an opportunity to respond to the new targets set
earlier in the year—he went on to declare that "that
is why they needed to consult with interested parties to ensure
that worthwhile projects continue to attract funding during the
transition to any replacement programme".[36]
A public consultation was finally released in April 2002, but
the responses received showed overwhelming support for leaving
it broadly unchanged and not transferring resources to a public
spending programme.[37]
While we appreciate the concerns raised by Economic Secretary
about value for money, there is evidence that the scheme was responding
well to the tighter criteria issued by the Government in 2001.[38]
We also note that the Public Accounts Committee (PAC) report to
which he referred will have been based on research from before
that time.[39]
25. Our suspicion remains that the Government saw reducing
the Landfill Tax Credits Scheme as a way of obtaining finance
for strategic central initiatives for which it would otherwise
have had to find additional funding. We are also amazed that—after
such a protracted course of deliberation and consultation—the
Government has not made available any information about the public
spending programme which will largely replace it.[40]
Varying the rate of VAT
26. Another ongoing issue we have raised with successive
Treasury Ministers is the scope for reduced rates of VAT to further
environmental objectives. Under its interpretation of EU procurement
regulations, the Government has the power to reduce VAT to 5%
in furtherance of its social policy, and indeed has done so for
fuel bills. But VAT on energy saving products remains at 17.5%
(except if they are installed as part of a Government funded scheme
to combat fuel poverty). This acts as a considerable perverse
incentive against the investment needed to achieve environmental
objectives.
27. The Government has consistently claimed that it is unable
to reduce VAT on DIY products because of EU procurement rules.
But they made a similar claim to us several years ago that they
could not reduce VAT on the installation of energy saving materials—
only for them to do a U-turn in Budget 2000.[41]
We also note that in our timber inquiry, for example, we heard
that France and Germany were adopting a radical approach in respect
of procurement, despite some doubt about the application of EU
rules.[42]
28. Our suspicions are raised still more by evidence which the
Association for the Conservation of Energy has recently unearthed
on this issue.[43] It
has pointed to an EU court case dating from 1988 which suggests
that the Government could, if it wished, justify a reduced rate
of VAT on DIY goods as part of its social policy. However, in
its supplementary memorandum to us, after quoting from an EU Commission
report on this issue, the Treasury goes on to state bluntly that
"This provision (ie a reduced rate of VAT) only applies to
installations of energysaving materials by contractors and
does not allow a reduced rate for goods sold separately for DIY
installation".[44]
Yet this statement is the Treasury's own interpretation and is
unsupported by any reference to EU legal advice.
29. The Government has justified as part of its social policy
zero VAT on new housing and reduced VAT on energy bills and on
contractor-supplied energy services; but it refuses to justify
as part of its social policy a reduced rate of VAT on DIY energy
efficiency products. In this respect, the Treasury's interpretation
of EU procurement rules appears illogical, inconsistent, and unsupported
by specific EU legal guidance. The Treasury must clarify its
position on VAT with regard to energy efficiency products in the
light of our concerns and the legal precedent which the Association
for the Conservation of Energy has cited.
30. A significant perverse incentive also exists with regard to
greenfield / brownfield tax incentives, with new housing being
zero rated for VAT, while renovations and rebuilds on brownfield
sites are subject to 17.5% VAT. We appreciate that the Treasury
has over the last few years introduced reduced rates for the latter
in specific circumstances (eg development of contaminated land,
and multiuser occupancies). But the perverse incentive still
applies. In earlier evidence to the Committee in March 2001, the
Treasury argued that addressing this perverse incentive would
be a major change and require considerable research.[45]
On several occasions, we have asked the Treasury what research
it has in fact carried out on this topic, and their latest response
suggests that no significant work has been carried out.[46]
31. We recommend that the Treasury immediately institutes research
into the present perverse taxation of building on brownfield and
greenfield sites, and publishes the results.
Climate Change
32. We were surprised that the Treasury should choose to
perpetuate the myth that the Government is on track with its Climate
Change strategy, by reproducing in PBR 2002 an outofdate
graph of carbon dioxide emissions.[47]
In our report on a sustainable energy strategy, published in July
2002, we expressed our concern that emissions from the electricity
generating sector were rising instead of falling as the DTI had
predicted.[48] It has
since become apparent that the entire 10 year transport plan is
also unlikely to yield the carbon savings which were initially
predicted. Recent work by the Sustainable Development Commission
has suggested that we are going to fall far below the 20% CO2
reduction which the Government has set for 2010.[49]
33. We note that at present generators are excluded from the current
Emissions Trading System (ETS)—one of the major differences
with the proposed EU Emissions Trading System. Also, companies
subject to the Climate Change Levy can meet their obligations
by limited participation in the ETS, but in 2002 certificates
were trading at only between £5 and £12 per tonne CO2
(ie about £18 to £44 per tonne carbon)—well below
even the Government's suggested price of £70 a tonne carbon.[50]
This reflects the oversupply of certificates and the absence of
a true market.[51] Moreover,
expected revenues from the Climate Change Levy have been successively
lowered and the outturn for 200102 was only £0.6 billion,
though this is expected to rise in later years.[52]
This hardly makes the Climate Change Levy equivalent to other
broadbased major taxes and raises question marks about the
extent to which the burden of taxation is truly being shifted
from 'goods' to 'bads'.
34. The Government's Climate Change Strategy for reducing greenhouse
gases is seriously off-course, and current progress and future
projections must be reviewed as a matter of urgency. There is
clearly a need for fiscal instruments to play a greater part in
bringing carbon reductions back on track, and the Treasury must
set out how it proposes to achieve this.
Aviation
35. In our view, there was a glaring failure on the part
of the Department of Transport (DfT) to give adequate weight in
its July 2002 airports consultation to the environmental impacts
of aviation—in particular, the global impacts on climate
change. Indeed, the main text of the consultation for the South
East of England focuses mainly on local environmental problems
such as noise and access issues.[53]
Various bodies have contributed consultation responses which are
critical of the underlying basis of the DfT consultation;[54]
while one of those, from the Royal Commission on Environmental
Pollution, has also produced a timely analysis which highlights
the increasingly serious impact of aviation on global warming.[55]
36. It was gallant of the Treasury to try to step in to remedy
matters by promising in PBR 2002 that it would discuss with stakeholders
ways in which fiscal instruments could be used to take account
of the environmental impacts of aviation; and that the results
would be incorporated in the White Paper on aviation due later
in 2003.[56] This belated
response was the least it could do once the failure of the Department
for Transport to give adequate consideration to this issue became
apparent. However, the Secretary of State for Transport appears
to have his own agenda. He has recently dismissed the Royal Commission's
report on aviation as superficial.[57]
He also dismissed the possibility of fiscal measures to take account
of the environmental costs of aviation, and indeed his reported
comments suggest that he has set himself against any rise in air
fares: "The commission's remedy was to try to price people
off planes. I think they might have some difficulty selling that
proposition".[58]
37. We asked the Economic Secretary whether it was sustainable—or
even logical—that one should now be able to travel to Spain
by air cheaper than to an English constituency by rail. We were
surprised at the difficulty he had in answering.[59]
We also note that, in this area as in others, the Government has
advanced concerns about international competitiveness as a reason
for failing to introduce environmental taxes. It has argued that
the UK cannot take action alone, but that a coordinated approach
to taxation at a European or even broader level is required. Yet,
the Government in other contexts expresses a general aversion
to any form of harmonised tax levels. In response to a parliamentary
question on European tax harmonisation, for example, the Government
recently stated: "The Government's view is that fair tax
competition is the way forward, not proposals for tax harmonisation.
The Government will not support any action at European level that
would threaten jobs and investment or damage the competitive position
of British business".[60]
38. The Treasury must resolve the current ambiguities in its approach
to tax harmonisation and make it clear where it stands on this
issue. If it is not in favour of tax harmonisation, it must set
out what policy approaches it favours to influence aviation demand
and reduce its environmental impacts. It should also clarify the
manner in which it will consult on fiscal instruments in relation
to aviation; and on how environmental sustainability can be fully
embedded in the approach taken by the Department for Transport
in preparing the aviation White Paper.
39. We are astonished by the views the Secretary of State for
Transport has recently expressed in relation to the environmental
impacts of aviation; and by his disregard for joined-up government
and the manner in which he has attempted to pre-empt the Treasury
consultation on this issue. His comments demonstrate a failure
in the mechanisms which the Government has put in place to embed
sustainable development at its heart, and are particularly surprising
in view of the great emphasis the Prime Minister placed on environmental
objectives in his recent speech.[61]
40. We note that the Transport Select Committee is currently carrying
out a wide-ranging inquiry on the future of aviation, and trust
that this will fully explore the failure by the department to
take adequate account of environmental impacts. For our own part,
we will follow up progress on the Treasury's consultation as part
of our evaluation of Budget 2003.
Agriculture
41. In our First Report of Session 2002-03, Pesticides:
The Voluntary Initiative, we highlighted our concern that
the current voluntary approach on pesticides may not be successful,
and we urged the Treasury once again to carry out further research
to prepare for the possible introduction of a pesticides tax.[62]
We were pleased that their response indicates they are doing so.[63]
By contrast, we cannot say the same of progress in developing
fiscal measures to address fertiliser use. We recall that this
was an area specifically highlighted in 1997, and that there has
been ongoing and increasing concern about the UK's ability to
meet EU water framework directive targets.[64]
DEFRA's Strategy for Sustainable Food and Farming included a commitment
to consult in 2003 on possible measures to control diffuse water
pollution.[65] It is
disappointing that we seem to be no further forward after six
years.
42. We note that EU regulations now allow member states to modulate
up to 20% of Common Agricultural Policy payments to finance environmental
objectives, subject to match funding by the member state.[66]
In practice, this means that the UK could transfer in the order
of perhaps £400 million from traditional subsidy schemes
(eg Arable Area Payments) to promote environmental schemes. Clearly,
match funding on such a scale would involve considerable additional
expenditure by the UK Government, and could therefore be difficult
to finance.[67] However,
a logical solution would be to utilise the revenues from taxes
on pesticides and a fertilisers to provide the match funding.
We asked the Economic Secretary whether he had considered this
as an overall strategic objective for fiscal instruments in the
agricultural area. Mr Healey responded that he had not considered
this, but would indeed do so.[68]
In our view, this is another example of the manner in which the
Treasury needs to develop its environmental tax strategy by setting
specific objectives.
43. Progress on developing fiscal instruments, in particular
to reduce fertiliser use, has been very slow and the Treasury—in
conjunction with DEFRA—needs to address this urgently. The
Treasury should utilise the revenues from such sources to provide
matching funding for environmental land-management schemes, exploiting
the opportunity offered in this respect by recent reforms of the
Common Agricultural Policy.
1
First Report of the Environmental Audit Committee, Session 1997-98,
The Pre-Budget Report, HC 547.
Third Report, 1997-98, The Pre-Budget
Report: Government response and follow-up, HC 985.
Fourth Report, 1998-99, The Pre-Budget
Report 1998, HC 93.
Eighth Report, 1998-99, The Budget
1999: Environmental Implications, HC 326.
Fourth Report, 1999-2000, The Pre-Budget
Report 1999: Pesticides, Aggregates and the Climate Change Levy,
HC 76.
Sixth Report, 1999-2000, Budget 2000
and the Environment, HC 404.
Second Report, 2000-01, The Pre-Budget
Report 2000: Fuelling the Debate, HC 71.
Minutes of Evidence, 14 March 2001,
Budget 2001, HC 333 of Session 2000-01.
Second Report, 2001-02, Pre-Budget
Report 2001: A New Agenda?, HC 363. Back
2
The Statement of Intent on Environmental Taxation was issued in
July 1997 as an annex to one of the Budget press releases. It
is reprinted at Appendix II (p xx) in the Third Report from the
Environmental Audit Committee, Session 1997-98, The Pre-Budget
Report: Government response and follow-up, HC 985. Back
3
Second Report of the Environmental Audit Committee, 2001-02, Pre-Budget
Report 2001: A New Agenda?, HC 363 Back
4
Second Special Report of the Environmental Audit Committee, 2001-02,
HC 1000. Back
5
Pre-Budget Report, Steering a study course: Delivering stability,
enterprise and fairness in an uncertain world, HM Treasury,
November 2002, Cm 5664. This document is hereafter referred to
as PBR 2002. Back
6
Ev 39-46. Back
7
Ev 1-14. Back
8
Environmental Audit Committee, Third Report of 2002-03, Annual
Report for 2002, HC 262, paragraph 16. Back
9
Ev 15ff. Back
10
Ev 28-37. Back
11
PBR 2002, page 139 paragraphs 7.50-51. Back
12
PBR 2002, page 140 paragraphs 7.52-56. Back
13
PBR 2002, page 136 paragraph 7.31. See also paragraph 60 below. Back
14
Ev 40-42. Back
15
Ev 45, and data from Customs and Excise (not printed). Back
16
Eurostat Term 2002 data shows that the UK ranked thirteenth
in the EU in terms of LPG and natural gas as a percentage of total
road transport fuel consumption, with a percentage of 0.02% compared
to an EU average of 1.22%. While this data related to 1999, figures
for 2001 from the UK 2002 Digest of Energy Statistics (table 3.4)
show no increase in LPG's share of the market (66,000 tonnes out
of a total of 37 million tonnes). Back
17
Ev 42. Back
18
Powering Future Vehicles Strategy, DfT, July 2002. Back
19
See http://www.hmce.gov.uk/business/othertaxes/historicrates.htm. Back
20
Q3. Back
21
Ev 29, 34-35. Back
22
Ev 29, 36. Back
23
Ev 30, Q9. See also footnote 93 below. Back
24
Fuelling Road Transport: Implications for Energy Policy,
November 2002, published by the Energy Saving Trust together with
the Institute for European Environmental Policy and the National
Society for Clean Air and Environmental Protection. Back
25
QQ 15-17. Back
26
PBR 2002 page 136 paragraph 7.32. Back
27
PBR 2002 page 139 paragraphs 7.50-51. Back
28
Environmental Audit Committee, Minutes of Evidence, 29 January
2003, to be published as HC 99-II, p 97. Back
29
Ev 30. Back
30
Q21. Back
31
Various categories of projects are funded under the LTCS. The
£47 million relates to community and local based projects
to improve sustainable waste management. This is the only category
of projects which will continue to be funded. Back
32
Waste Not, Want Not: A strategy for tackling the waste problem
in England, Cabinet Office, November 2002, page 103-104, recommendation
24. Back
33
Environmental Audit Committee, Budget 2001: Minutes of Evidence,
14 March 2001, HC 333, 2000-01, Q 68. Back
34
Ibid. Q 67. Back
35
House of Commons Hansard, written answers for Thursday 10 May
2001. Back
36
Environmental Audit Committee, Pre-Budget Report 2001: Minutes
of Evidence, 5 December 2001, HC 363-ii, 2001-02, Q 196. Back
37
See HM Treasury consultation and summary of responses at:
http://www.hmtreasury.gov.uk/Consultations_and_Legislation/Landfill_Tax_Credit_Scheme/consult_landfill_index.cfm Back
38
See, for example, paragraph 8.18 of the Strategy Unit report on
waste (Waste Not, Want Not: A strategy for tackling the waste
problem in England, Cabinet Office, November 2002). Back
39
Q 24. See also the Forty-Seventh Report of Session 2001-02 from
the Committee of Public Accounts, The Landfill Tax Credits
Scheme, HC 338, July 2002. This was based on the C&AG's
Report on the Appropriation Accounts 1999-2000, Vol 16 (HC 25-XVI,
Session 2000-01). The report on the Landfill Tax Credits Scheme
from the Environment, Transport and Regional Affairs Committee
(March 2001) also pre-dated the introduction of new targets. Back
40
PBR 2002 page 140 paragraph 7.53 refers only to the Government's
general intention in this respect. As at 12 March 2003, details
of the public spending programme had still not been made public. Back
41
Sixth Report from the Environmental Audit Committee, Session 1999-2000,
Budget 2000 and the Environment, HC 404, paragraph 43. Back
42
Sixth Report from the Environmental Audit Committee, Session
2001-02, Buying Time for Forests: Trade and Public Procurement,
HC 792, paragraph 18. Back
43
See Annex to this report. Back
44
Ev 32. Back
45
Environmental Audit Committee, Second Report of Session 2001-02,
Pre-Budget Report 2001: A New Agenda?, HC 363-I, paragraph
32. Back
46
Ev 31-32, response to question 21 Back
47
PBR 2002, page 131 Box 7.1. The graph of past emissions of carbon
dioxide fails to reflect the increased emissions in 2000 and 2001
referred to in the text immediately above. Back
48
Environmental Audit Committee, Fifth Report of Session 2001-02,
A Sustainable Energy Strategy? Renewables and the PIU Review,
HC 582-I, paragraphs 79ff. Back
49
Sustainable Development Commission press notice of 12 February
2003 and related reports. See
http://www.sdcommission.gov.uk/events/news/pressrel/030212.htm. Back
50
Presentation by James Emanuel (ICAP) at CHPA conference, Carbon
as a commodity, 28 January 2003. See http://www.bcse.org.uk/whatsnew_stories/Carbon%20as%20a%20Commodity%20II/Carbon%20as%20a%20Commodity%20II.htm
. For the Government's price, see paragraph 58 below. Back
51
It is also important to note that the trading price represents
the marginal cost to companies of reducing carbon emissions (the
"abatement cost"), rather than the true cost including
environmental costs (the "social cost"). Back
52
PBR 2002, page 197. Back
53
The Future Development of Air Transport in the United Kingdom:
A National Consultation, Department for Transport, July 2002.
This was launched as a series of regional consultations. See:
http://www.aviation.dft.gov.uk/consult/airconsult/index.htm. Back
54
Eg the Sustainable Development Commission
(at http://www.sdcommission.gov.uk/pubs/air/index.htm
) and the Royal Commission on Environmental Pollution (at
http://www.rcep.org.uk/news/0205.html). Back
55
The Environmental
Effects of Civil Aircraft in Flight, November 2002. See: http://www.rcep.org.uk/aviation.html. Back
56
PBR 2002 page 139 paragraph
7.47. Back
57
The Times, 12
February 2003. See also House of Commons Hansard, 17 December 2002
column 677. Back
58
idem. Back
59
QQ 55-58. Back
60
House of Commons Hansard,
written answers for 18 December 2002. Back
61
Prime Minister's speech
on the launch of the Government's sustainable development annual
report, 24 February 2003. See: http://www.number10.gov.uk/output/Page3073.asp.
Back
62
First report from the
Environmental Audit Committee, Session 2002-03, Pesticides: The
Voluntary Initiative, HC 100, November 2002. See: http://www.parliament.thestationeryoffice.co.uk/pa/cm/cmenvaud.htm. Back
63
First Special report
from the Environmental Audit Committee, Session 2002-03, HC 433. Back
64
Economic Instruments
for Water Pollution, DETR, 1997. See also the Environmental
Audit Committee's Fourth Report of Session 1999-2000, The Pre-Budget
Report 1999: Pesticides, Aggregates and the Climate Change Levy,
HC 76-I. Page x of the report contains a useful table highlighting
developments in this area. Back
65
The Strategy for
Sustainable Farming and Food, DEFRA, December 2002, page 24
paragraph 2.3.1. See:
http://www.defra.gov.uk/farm/sustain/default.htm. Back
66
For a wider discussion
of agriculture and CAP reform, see Environment, Food and Rural Affairs
Committee, Ninth Report of Session 2001-02, The Future of UK
Agriculture in a Changing World, HC 550-I; and the same Committee's
Third Report of 2002-03, Mid-Term Review of the Common Agricultural
Policy, HC 269. Back
67
This was recognised
by the Environment, Food and Rural Affairs Committee in its Ninth
Report of Session 2001-02, The Future of UK Agriculture in a
Changing World, HC 550-I paragraph 68. Back
68 QQ
51-54. Back
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