UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 233-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

ENVIRONMENTAL AUDIT COMMITTEE

 

PRE-BUDGET REPORT 2003

 

Wednesday 21 January 2004

JOHN HEALEY, MP, MR PAUL O'SULLIVAN and MS MRIDUL BRIVATI

Evidence heard in Public Questions 1 - 85

 

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Oral Evidence

Taken before the Environmental Audit Committee

on Wednesday 21 January 2004

Members present

Mr Peter Ainsworth, in the Chair

Gregory Barker

Mr Colin Challen

Mr David Chaytor

Sue Doughty

Paul Flynn

Mr Simon Thomas

Joan Walley

David Wright

________________

 

Witnesses: John Healey, a Member of the House, Economic Secretary, Mr Paul O'Sullivan, Head of Environmental Transport for Tax Team, HM Treasury, and Ms Mridul Brivati, Head of Environment, Food and Rural Affairs (EFRA) Team, examined.

Q1 Chairman: Good afternoon, Minister. Welcome to you and your colleagues. We know for an almost certainty that we are going to be interrupted at four o'clock. I understand that you have a few opening remarks that you would like to make. What I propose is that you make those remarks and then we break and return after the vote rather than beginning the evidence session and having to stop it after five minutes. Is that agreeable?

John Healey: Mr Ainsworth, that is certainly agreeable.

Q2 Chairman: Before you make your opening remarks, however, I would just like to place on record the concern that this Committee has. We try to be co-operative. We regard our role as being one of assisting Government in achieving the targets that Government itself has set and as you will find this afternoon, there is quite a large number of areas, including aviation, energy efficiency and overall tax strategy, where we fear at the moment that the Government is not meeting its targets or not trying very hard to. I hope that within the course of this session you will be able to give us some reassurance on some of these issues.

John Healey: Mr Ainsworth, thank you very much. May I start by congratulating you on becoming the Chairman of this Committee.

Q3 Chairman: Thank you.

John Healey: For my part and for the Treasury's part, we try to be as co-operative as possible with this Committee. I was a strong supporter of it when it was set up after the 1997 Election. I think you have a very important role to play in auditing the performance and policy development right across Government in relation to the environment. I recognise the difficult role that you play in trying to carve out a particular set of responsibilities that distinguishes you from the role of the departmental committees, but we wish to be as supportive as possible and as co-operative as possible to the work that you undertake. I hope that through this evidence session this afternoon I can give you and your Committee members some reassurance on the points that clearly are of concern to you. Can I start by introducing Paul O'Sullivan who heads up the Treasury's Environmental and Transport Tax Policy Team and Mridul Brivati who is Head of our Environment, Food and Rural Affairs Spending Team shadowing essentially the work of the EFRA Department. Mr Ainsworth, when I asked if I might say a few words to start off I was told to be brief and I was told not to try and answer the questions the Committee had not yet posed. I know you will be interested in some specific policy matters, but I would like to make two general points about the broader picture if I may. Firstly, in the Treasury and across Government we are pursuing our approach to the use of taxation and other economic instruments in relation to environmental ends just as we set out in the document we published alongside the Pre-Budget Report in 2002, Tax and the Environment: the use of Economic Instruments. I would suggest to the Committee that not only are we pursuing that approach and the principles set out in that publication but we have proved ourselves ready to use and develop a wide range of economic instruments, including taxation where that is appropriate, everything from the reform of company car tax to the Climate Change Levy, to support for the Carbon Tax Trust. Secondly, perhaps the biggest environmental concern and challenge to us all is that of climate change, a concern to which many specific policies are targeted. We are making clear progress not just towards meeting the Kyoto targets that obviously the UK in common with other countries signed up to but towards meeting the set of more challenging and more aspirational targets that the Government set out in the Energy White Paper. The provisional data for 2002 shows that UK emissions of greenhouse gases fell by between 14 and 15 per cent between 1990 and 2002 and the UK, along with only Luxembourg and Germany at present, is one of the countries which at present are on course to surpass the commitments that we made at Kyoto. I know this is an evidence session in which you are wishing to cross-examine me and my officials about the Pre-Budget Report and there are some significant areas of concern to those interested in environmental policy in the Pre-Budget Report, ie the extension of the eligibility of other sectors to climate change agreements, the framework for alternative road fuels, how we discount duty and plan for that in the long term and the proposal for a package of measures to recycle the increased landfill tax revenues to business. However, there are other areas which this Committee has taken a very active interest in which are not directly dealt with in the Pre-Budget Report, such as aviation and plans for the future of aviation and also the development of the European Union Emissions Trading Scheme for instance. Mr Ainsworth, I would be happy to try and help the Committee with questions that you may have on those wider areas as well as specifically on the Pre-Budget Report this afternoon.

Chairman: Thank you very much indeed for those opening remarks. Does anyone have anything to observe in a fairly quick fashion?

Q4 Mr Challen: In relation to the reduction in emissions that you mentioned between 1990 and 2002, to what extent do you think that was due to the play of ordinary unplanned market forces in the reduction of generating capacity in the UK, particularly in gas fuel generation and energy generation?

John Healey: It is certainly true that the pattern of power generation, because it is responsible for such a large part of the emissions produced in this country, is such that where there are alterations in the power plant used there will be an impact on the level of emissions, but I think it is unarguable that some of the policies that we have been putting in place as part of the wider Climate Change Programme have started to bear down on the level of emissions and have attributed to that detectable fall over the last decade or more.

Q5 Mr Challen: But if the market conditions change it is theoretically possible that these mothballed gas power stations might be put back into use - I am sure that is what the generators would like to do - and that might make a very big dent in the previous downward trend.

John Healey: Clearly if the pattern and source of power generation changes and changes towards those processes that are more polluting, that will have an impact on the level of emissions. That is why measures such as the renewables obligation are really so central to this part of the Climate Change Programme and it is also why the introduction from 2005 of the Emissions Trading Scheme on an EU level, which will include generators, is such a central plank and we have described it in our Energy White Paper as part of what we need to do for the future.

Q6 Joan Walley: Can I welcome you to our Committee. Can I just clarify your opening remark where you welcomed the setting up of the Environmental Audit Select Committee following the 1997 Election and the work that has been done, but can I ask you to clarify what you meant by the difficulty that the Committee is having in terms of being a cross-departmental committee? We see our role as being absolutely crucial in terms of holding other government departments to account in respect of environmental audit. I wanted to hear your affirmation of that.

John Healey: Clearly in the end it is for the members of the Committee to interpret the remit and the role Parliament has given you in setting you up. I think what I had in mind was two things. The first is the obvious difficulty for a Select Committee that shadows the work of the whole Government and not a particular department. I think that poses particular challenges. The second is the difficulty this committee will have in auditing the performance when many other departmental Select Committees are also looking as much ahead at potential policy development as performance and delivery of the departments that they are responsible for holding to account and shadowing. I think that is the second way that this Committee has a very particular role which poses potential challenges for finding its place in that general system of scrutiny that Parliament must, and rightly does, exercise over the executive.

Chairman: Maybe if Government were a little bit more joined up our task would be easier, but we face the tasks that we are set with considerable confidence. I hear the division bell. We will see what sort of niche we can cut this afternoon. Thank you, Minister.

The Committee suspended from 4.03pm to 4.12pm for a division in the House

Q7 Chairman: Thank you for that. I am sorry about the interruption. Minister, I referred just before we broke to the whole question of joined-up government. I was very struck to note that just before Christmas the Government published the Aviation White Paper which involved a very significant increase in airport capacity in this country and very shortly after Christmas the Government's Chief Scientific Adviser, David King, published an article in which he said that climate change "is the most severe problem that we are facing today, more serious even than the threat of terrorism". Given that aviation is the fastest growing source of climate change gases, how joined up is that?

John Healey: I do not think it is a reflection of a failure to join up but a reflection of what is genuinely a set of different pressures and tensions in policy making in this area, a very strong case for aviation as part of the driver of economic growth and prosperity in the future, a very strong case for aviation recently being opened up to people who have never been able to afford to fly before, but an equally strong case that the future development of aviation has to be matched by a framework that makes sure that that is an industry which does not bring a disproportionate environmental cost for the rest of us. So you have got both an economic and an environmental policy challenge in terms of trying to plot our way forward and devise a framework for seeing aviation develop, our airports develop and also that our environmental and anti-pollution policies develop in the future. That was essentially the balance that the Government tried to strike and set out in the Aviation White Paper just before Christmas.

Q8 Chairman: I think some of us are beginning to doubt whether the balance is there or indeed achievable if the economic case for aviation continues to take such dominance over environmental issues.

John Healey: Although the coverage and the popular interest certainly over the Aviation White Paper was focused on extra capacity runways and precisely where the location for those and the go ahead might come, I do not think it is fair to say that this was a White Paper that did not have an environmental balance contained within it. I say that for a couple of reasons. Firstly, despite huge economic benefits and huge demand for extra runways this was a White Paper that did not commit to three extra runways. There were also some very significant steps forward in terms of environmental policies and pressure on aviation. The Emissions Trading Scheme at a European level is the obvious and most important part of that package. What is clear in the Aviation White Paper is that any capacity decisions for the third runway at Heathrow will be contingent on environmental improvements, particularly air quality and they will only go ahead if certain standards for NOx emissions are met. The expansion of noise charging will accompany any developments of airport capacity. New schemes to compensate those living around airports for the impacts of noise are part of the package as well. There will also be new legislation that will require airports to include an emissions related element in the charges that they already levy. So there are some strong environmental elements in this package, not just a go ahead and an encouragement and support for the expansion of our airport capacity in the future.

Q9 Chairman: If I may interrupt. The prime concern here at the moment is the question of CO2. The Department of Transport has now accepted that if we include radiative forcing - I know you are familiar with that concept because we have discussed it in the past - CO2 emissions will amount by 2030 to at least 170 million tonnes a year which equates to 75 per cent of the total UK target for 2050. Do you not think that 75 per cent is quite a lot? Given the concern being expressed by the Government's Chief Scientific Adviser, do you not think it is irresponsible to sanction growth on a scale that was sanctioned just before Christmas?

John Healey: You know the concerns and the criticisms of the discussion that has taken place over the figures that your Committee published in its Report and you know that whilst aviation currently accounts for about five per cent of the UK emissions at present, our figures suggest that by 2030 it will account for about 33 to 35 per cent, not the proportion of the 2050 target that you are wishing to use.

Q10 Chairman: Your 25 per cent figure is relative to current levels and is not relative to the levels as they are envisaged to be reduced in accordance with meeting the target of that 60 per cent reduction. We have had a paper from the Department which says that they do not dispute the broad order of magnitude of our estimate. We have had dialogue with them since publishing our Report, but they have now accepted that our figures were basically correct.

John Healey: Your figures and the 33-35 per cent of domestic total for the UK that aviation would be set to be in 2030 that I have just cited do not take into account any policy measures that might be put in place in the meantime to improve the emissions performance or reduce them. There are other difficulties with the sort of calculations that the Committee has made in reaching your total.

Q11 Chairman: I am sorry, Minister, but we cannot have a situation where the Department of Transport accepts our figures and the Treasury does not. You are right to say that our job is a hard one if we have Government departments that cannot agree on the figures. Can I approach this by another route? In the Pre-Budget Report you quote in box 7.2 a figure of ten to 12 per cent for projected emissions from aviation. Can you confirm that these figures completely ignore the effect of radiative forcing and, of course, the six per cent carbon reduction target?

John Healey: Can I ask Mr O'Sullivan if he may be able to help on some of the technicalities of the figures here?

Mr O'Sullivan: I can confirm that the ten to 12 per cent figure in the PBR Report was CO2 emissions which did not take account of radiative forcing.

Q12 Chairman: Why not?

Mr O'Sullivan: I think we were given that figure partly because, as we have been told by some of the scientific community, we have to be very careful about the treatment of radiative forcing. We have been using the 2.7 figure and we are happy to continue to use that for illustrative purposes, but it is a very difficult area and there is a lot of uncertainty about exactly what the right factor is. If you were to include the 2.7 radiative forcing that would give you something akin to 33 per cent, I think we recognise that, but what both we and the DFT have said is that is assuming you get no changes in the technology coming through, no changes in the operations that can reduce radiative forcing. So I think we and DFT are at one in that if you had the growth that has been projected with no change in the technology or the operations then that might be the outcome, but I think we are both saying that we would expect the measures in place to start to reduce both radiative forcing and CO2 emissions from transport over time.

Q13 Chairman: You still have not taken any account of progress towards meeting the Government's CO2 reduction target of 60 per cent. Also, it would seem that the figures are inconsistent because you did use the 2.7 per cent radiative forcing factor in calculating environmental costs.

Mr O'Sullivan: I think we said that both that and the social costs to carbon would be for illustrative purposes. We have had further discussions with some of the scientific community who say one needs to be quite cautious about using the 2.7 figure.

Q14 Chairman: So walking away from that figure was basically the basis of your calculations?

Mr O'Sullivan: I would not say we are walking away from that figure, I would say we are just being careful about the scientific uncertainties about radiative forcing, but we accept it is very important.

Q15 Chairman: Minister, there needs to be a far greater degree of clarity here. It is not acceptable to be using one science on the basis of some calculations in this field and another set of scientific assumptions for different calculations.

John Healey: I would agree with that general contention because none of us is able to make a comparable assessment of how strong the policies that we are proposing are unless we are using some common baselines. To the extent that further work with the Committee and your advisers might help us reach a common base at least on our assessment of the current contribution that aviation makes and its prospective contribution with and without some of the policy measures and the improvements that one might anticipate being put in place, I think might be very helpful. Where I suspect that the Committee might agree with the Government and with me is that the concern about climate change is clearly the major challenge for us all and I think we would agree that transport as a sector is a very serious and major contributor to the problems that we face. Aviation contributes about five per cent to the current UK emissions and road transport about 20 per cent. Secondly, I think we would probably both agree that aviation poses a potential threat or challenge first of all because, although radiative forcing is present in other sectors, it is singularly intense in aviation. Secondly, with the likely increase in demand and use of aviation then clearly this is a transport sector which is going to contribute, as I think the Committee is very clearly setting out, an increasing part of the challenge that we face on climate change. Where I suspect the area for discussion and potential difference lies is the judgment that you as a Committee might take or we as a Government might take over the adequacy of the policies, including the economic instruments that we put in place to try and deal with the environmental side of the expansion of aviation.

Q16 Chairman: Neatly stated. Let us return to some specifics. You said in a previous Pre-Budget Report that you were going to examine the possibility of using fiscal instruments to address the environmental costs of aviation. When the latest Pre-Budget Report came out the reader would look in vain for any reference to that and in fact was referred to the forthcoming Aviation White Paper. We get to the Aviation White Paper and there is no specific provision in that at all for the use of fiscal instruments. What has been going on?

John Healey: When we began the consultation on the use of economic instruments in relation to aviation we were clear from the outset that that had to be a consultation that ran in parallel with the one that was led by the Department for Transport on the extended capacity and that we would pull the Government conclusions on both parts of this together in the Aviation White Paper, which is what we did. In other circumstances one might have expected policy plans and announcements to be made in the Pre-Budget Report, but from the outset of the consultation that is what we undertook to do because it made sense to join them up and that is why they were in the Aviation White Paper.

Q17 Chairman: Where were the fiscal instruments that you indicated you were considering? Did you consider them? What did you consider? Did you consider, for example, increasing Air Passenger Duty?

John Healey: We looked at the existing duties and taxation relating to aviation. The problem with Air Passenger Duty as it stands is that it is a blunt instrument for anyone interested in environmental policy and environmental improvement, essentially it is a per passenger head charge. A plane with the same number of passengers that has the most modern engine technology and the cleanest set of emissions is charged exactly the same rate as the oldest, dirtiest plane in the sky. So clearly if you are interested in environmental policy and objectives then Air Passenger Duty as it stands is not an instrument that is likely to be useful or relevant to the environmental ends. The things that we did consider and indeed are in the Airport White Paper include the inclusion of aviation in the European Union Emissions Trading Scheme from the beginning of the second phase in 2008 and an increased use of scale charges for noise and trying to deal with noise pollution around airports.

Q18 Chairman: I am sorry, Minister, but you are re-treading ground that you mentioned in your opening remarks. Air Passenger Duty, for all its flaws, I think we would agree, does not directly or in a clever way address environmental concerns but it does put some impact on short-haul flights. Did you, for example, consider this Committee's recommendation of an emissions charge to replace Air Passenger Duty? Was that one of the things you looked at and dismissed?

John Healey: No.

Q19 Chairman: Has it sunk without trace?

John Healey: No, not at all. We considered it very carefully because clearly it is more likely to be more directly related to the concerns that in Government we share with the Committee over the environment. It is precisely the basis on which our view that aviation needs to be part of the Emissions Trading Scheme is based.

Q20 Chairman: The problem with the Emissions Trading Scheme is it is not going to be around for years, is it? What this Committee recommended back in the summer was, in light of the time that it was going to take to put in place an Emissions Trading Scheme and in light of the growing concern about the environmental impacts of aviation, the Government should look hard at an emissions charge on aircraft and I am not getting the feeling you actually took that very seriously.

John Healey: If you will forgive me, Mr Ainsworth, I am just going to come on to explain one of the constraints that became much clearer during the consultation period over doing precisely what the Committee was recommending. What became clear to us in considering the case and the wish to move for an emissions based form of charging on aviation - and all the constraints are there in the international conventions that the Committee know about - was that we were going to be more constrained than we imagined by a European court judgment in the case it took against the Swedish Government in which it ruled against the imposition of any charge "with a direct and inseverable link to fuel consumption". In other words, in looking for the scope in which to consider an emissions-based charge on aviation we are constrained not just by the international conventions but in fact by EU regulations, which is one of the elements of work that we are now starting to tackle. At the appropriate time I would like to explain the work we now have in hand or are putting in hand in order to try and deal with some of the concerns about emissions and also to lay the ground for being able to get aviation into that trading scheme.

Chairman: Thank you.

Q21 Sue Doughty: The Aviation White Paper refers rather vaguely to further consultation on possible measures. Is there going to be any consultation on possible fiscal measures in the foreseeable future?

John Healey: I will explain what we are now doing because that will answer the question of consultation. First of all, we have now started discussions with the Commission on incorporating aviation into the Emissions Trading Scheme. We have started discussions within Government about how we plan to make sure that we can secure that in time for the beginning of the second phase. We will start discussions shortly with the industry and the other interests groups that you are interested in. This will be one of the priorities for the UK presidency in 2005. We will be starting discussions in particular with the Dutch who will hold the presidency of the European Union in the six months before us because our aim will be to try and secure agreement to the inclusion of aviation in this Emissions Trading Scheme during our presidency in the second half of 2005.

Q22 Sue Doughty: What worries the Committee is the fact that Mr Darling has said that measures will only be considered "if they do not damage UK competitiveness in an international context". Are there any fiscal measures which do not do this? Where we get worried is that every time we appear to be getting somewhere near to how we manage environmental demands by using fiscal measures somebody will always come back with this competitiveness clause. Can you tell us how you are going to approach that so that we are getting fiscal measures that manage the environment, particularly in the context of aviation, which will mean that we are competitive and we are also accepting our own environmental demands and responsibilities?

John Healey: We will approach this in the way that we approach other similar tensions because these are fundamental, as we discussed slightly earlier on. The tension is between the requirements of business that arguably could affect the competitiveness with the concern about environmental costs and the principal position that where industry is polluting it should pay the costs and consequences of that pollution. We will try to balance those competing tensions with the design and introduction of the Climate Change Levy and just as we are trying to balance those tensions with the allocations for the UK installations as part of the European Union Emissions Trading Scheme, we will do the same with aviation in this particular instance.

Q23 Sue Doughty: Let us move on to the inclusion of aviation in an UK Emissions Trading Scheme. As an audit committee we want to know whether it will be effective. Do you think the inclusion of BA in the UK Emissions Trading Scheme has been an effective use of taxpayers' money, given that we expect that BA will get , 7 million for doing absolutely nothing?

John Healey: The Committee will be well aware that BA forms part of the world's first economy-wide training scheme. Part of the terms of getting that off the ground was to incentivise and encourage companies and sectors to be part of that. I do not know how the balance of costs and benefits to British Airways might work out, but I think the inclusion of aviation in the trading scheme for the future is going to play a central role in our ability to be able to make the industry pay its way for the environmental costs that it imposes and a central part of our making this industry improve its environmental performance in the future and a central part of trying to make sure that this is an industry which does not exacerbate and cause really unmanageable problems for us in trying to tackle the long-term challenge of dealing with climate change.

Q24 Sue Doughty: Could I turn now to some other concerns we have had. This is going over some of the ground we went over with the Secretary of State for Transport. We have big concerns about the contrast between road fuel duties and aviation and indeed the comments you made about the affordability of air transport and people expecting to travel by air and the fact that this does not seem to be a big issue for people where there is not even a bus for them to take to get to the local shops. You are using road fuel duties to manage demand and to earn revenue. Do you not think you could do the same for aviation?

John Healey: As we examined in the last session, I do not accept that you can draw this direct comparison between roads and aviation. If we are considering the question of environmental policy, then the important fact for us is what the environmental costs are that is imposed by this particular form of activity. Three-quarters of the environmental cost from road transport is in fact congestion and that simply is not applicable to air transport. So any direct comparison of looking to use duty to manage demands which may be appropriate in the long term for roads simply is not directly translatable to the aviation sector.

Q25 Sue Doughty: I am interested in what you are trying to say there, but there are other aspects as well as congestion, congestion is not the only thing we have concerns about. We still have this difference between the tax on aviation and the tax on roads. We have a 400 per cent tax on the motorist and aviation users are getting off relatively scot-free. We are starting to see congestion in the skies as being a real issue too and this is one of the things that the Government's policy is trying to address. It is very difficult to see how you can justify this tax on roads where congestion is an issue on the ground but not in the sky.

John Healey: I do not think I can add much more to what I said earlier except to say that there is a degree of demand management in aviation that is not done through duties, it is done through charges for access slots and so where you have high demand destinations the charges are higher. Inbuilt within the aviation system is a degree of demand management. All I am saying is that drawing a direct comparison between road and aviation and looking for fiscal duties to play the role that they may potentially play for roads and aviation just is not comparable.

Sue Doughty: I disagree with you, but I know we need to move on.

Q26 Mr Thomas: We have been sent evidence to this Committee which shows that at the moment air congestion accounts for 60 per cent of unnecessary fuel burn. Surely with the problems we have seen in air traffic control in this country and in Europe there is a very good reason to think that any expansion of air travel will only add to that congestion, it will add to unnecessary fuel burn and add to the unnecessary and unacceptable effects of CO2 emissions on climate change and therefore it is something that you should be considering now in advance of the increase of air traffic that you foresee in the White Paper.

John Healey: My point was essentially that the scale of environmental costs and the consequences of congestion in terms of the roads sector are of a totally different order to that of aviation. Arguably the expansion of runway capacity will not necessarily lead to increased congestion. As everyone would recognise, it will lead to an increase in flights and of aviation movements and to that extent it clearly increases the potential emissions of the industry, it adds to the climate change consequences that we were discussing earlier, but congestion is not a major feature of that.

Q27 Mr Thomas: I think what this Committee is seeking to understand is why road travel is treated so differently to air travel when the effect in terms of travel in general on our climate change objectives is so obvious. Let us take as an example a constituent of mine seeking to go from Aberystwyth on a cheap flight that they got with Easyjet to Malaga, they may see that as a very cheap option for them, but they have got to get to Luton or Stansted in the south-east of England to take advantage of these cheap flights and that means a road journey. They will be paying a heavy environmental tax price for the effect of that road journey on the environment. When they get on that plane they do not pay that price. The , 25 billion raised from road fuel duties many would argue is more than the actual environmental cost of those road journeys and yet the reverse is true when that person gets on that aircraft. Intellectually and politically that is not sustainable, is it? There must be a change in that respect.

John Healey: One of the factors in road transport duty is not simply to cover the environmental costs of that form of travel, although an interesting discussion could be had about the extent to which it does or does not make a significant contribution to the general revenues of Government. It is part of the broad base of tax that we have in this country and it makes a very significant contribution to what the Government has available to spend on the police, on counterterrorism, schools or hospitals. The ability for the UK Government even to contemplate duty changes on air fuel is entirely constrained not just by the European Directive potentially but by this complex web of international agreements under an international Convention and is underpinned by more than 2000 bilateral agreements which make it very difficult to unpick and go down the sort of route that intellectually you are trying to make the case for.

Q28 Mr Thomas: I accept that and I am sure many of the Committee would as well in those terms. Over three years ago Mr Prescott told me in an oral reply in the House of Commons that the Government would be "taking the lead" on those very issues that you have just outlined and yet it seems to me at least that three years have gone by and no lead has been taken and now we have been told that in 2005 a lead will be taken. With each and every year that passes the effect of air travel on the environment increases and the ability of ourselves as a nation to take some of that back and do a similar approach to road transport is getting less and less, in fact it is literally flying away from us. Would you not accept the criticism that nothing has been done by the Treasury to move this on in the last three or four years?

John Healey: No, I would not accept that nothing has been done within Government because we have been making these arguments at an international level. What I would accept is that we have very little to show for it and that is a reflection of two things: (1) the resistance of some other significant nations to such changes and (2) just how complex this set of international agreements is to unpick. We accept the case that we should have the freedom and the scope to levy different duty rates on aviation fuel. It is an anomaly within the system at present. On a European level which internationally is, if you like, more within our reach, we are the country that is leading on many of these climate change policy programmes. We are the first country anywhere in the world with an economy-wide emissions trading programme. We are leading the way in the preparations for the European trading scheme and, as I have explained, we will make this one of our aids for the UK presidency in securing the agreement that allows us to take aviation into that trading scheme.

Q29 David Wright: Could I move us on to the issue of energy efficiency, particularly in relation to domestic households. The pre-budget report states, "The Government agrees that there is a case for the use of economic instruments as part of a package of measures to promote energy efficiency." I am sure we can all sign up to those objectives. The Treasury has undertaken two consultation exercises on domestic energy efficiency - the latest one closed in October 2003 - but I note from the pre-budget report that there are no specific proposals or any specific new proposals in the report relating to particularly domestic energy efficiency; could you tell us why that is.

John Healey: Yes. We completed the consultation on specific measures that might be useful in trying to improve levels of domestic energy efficiency as part of the contribution to the broader climate change programme just before the pre-budget report. There were two areas of significant uncertainty which really prevented us from being able to assess the responses we had to the consultation and make the sort of decisions that we might have wished to in time for the pre-budget report. Those are first of all a more general review of corporation tax which is currently being conducted. The significance of this is that it would affect the context in which we might want to look at bringing in allowances to encourage private landlords to invest in energy efficiency and the way that we might, in particular, encourage companies that provide energy efficient products to provide those to some of the programmes for improving energy efficiency in the home. The second is that we were in the throes, in the run-up to the pre-budget report, of arguing our corner very hard at the European level over whether or not we could see increased scope to reduce the rate of VAT in two principle areas. First, on the installation of energy saving materials if you or I were doing it ourselves at home and, secondly, the ability to reduce the rate of VAT on energy efficient products which, at the moment, the rules prevent us from doing because the rules prevent us from a reduced rate of VAT for one set of products which may be in competition with another.

Q30 David Wright: I understand that and I think that one or two of my colleagues may want to return to the VAT issue in a moment or two, but that does not stop the Government considering other options such as placing surcharges on inefficient appliances or bringing in proposals to include the energy efficiency status of properties in council tax banding for example or indeed placing surcharging on the sale of properties that are particularly energy inefficient, therefore encouraging house sellers to invest before sale, for example. Have you considered any of those types of proposals? We have certainly had representations in relation to them and indeed, for example, in relation to badging of property in terms of energy efficiency ratings.

John Healey: We certainly have had representations, like the Committee has, on some of those aspects. They came through clearly in the consultation: 18 of the 126 respondents raised product charges as a measure that they thought would be effective. That was dwarfed by some of the support that we had for reduced rate of VAT where 100 out of 126 supported the idea that we should do that if we could for energy saving materials by contractors in non-grant schemes. The measures that we now are looking very seriously at and clearly we are taking into account in this coming period, with an aim to try and make announcements around the time of the Budget on this, the responses that we did get during the consultation right across the range. The ones we are looking in particular at include a domestic business tax allowance. The purpose of this really is to try and encourage greater energy efficiency investment in the private rented sector which I think we would probably agree is the most intractable part of the housing sector to try and see energy efficiency improvements put in place. We are looking at the possibility of VAT reductions where the current rules, not just the potentially changed rules in Europe, might allow us to help in this area, and we are also looking seriously at this question of, put in the context of the corporation tax review, capital allowances or enhanced capital allowances may play a part as well.

Q31 David Wright: Have you considered the other two options I have just mentioned, particularly in relation to disposal of property either through stamp duty or it could be done through the new Homebuyers Information Pack that an energy efficiency assessment ought to be made of a property at the time of its disposal and an additional charge could be placed on that through stamp duty if the property was particularly energy inefficient? That would encourage existing homeowners to invest in bringing the efficiency status of their home up to standard before sale.

John Healey: The short answer is "yes". The slightly longer answer is that, in fact, using stamp duty and the fall in stamp duty to these ends was quite strongly supported in the consultation in that just over half of the respondents highlighted this. I think there are two principal concerns that we have about stamp duty in this respect. The first is that when householders buy a property, the following six to 12 months tends to be the period in which they make improvements and they make improvements including some of the sort of measures that would improve the energy efficiency of those homes. So, the risk to Government quite clearly and all of us concerned about the best use of public money is that if you offer some sort of stamp duty incentive at that point, you run the risk of significant deadweight costs. The second is that, in 2,000 wards across the UK which we designated as enterprise areas, there is in fact no stamp duty charged on domestic property up to the threshold of £150,000 and many of these areas are the most rundown and the most deprived, which is precisely why we have designated them as such, and these areas are the ones in which we want to see this type of improvement in energy efficiency tied to the contribution that makes dealing with some of the fuel poverty and the cold that people have to suffer during the winter and precisely whether the need for that sort of programme is most acute.

Q32 David Wright: I accept that. The other point was about, as you wander round your white goods stall in your local area, very often the cheapest product, the cheapest refrigerator or whatever, is the least energy efficient because it is historically the cheapest technology. There must be an argument alongside VAT reduction to actually be saying to companies, "If you produce products that in the lower bands of energy efficient status for a particular product, we will slap a tax on it."

John Healey: I think the increasingly clear labelling on some of these products with the energy efficiency ratings which are used is helping that sort of consumer decision making. The principle case that, if you create a price differential, then you might both give a signal to the sort of purchases and the sort of products that, as a government, you want to consider but you also may, if the price signal is such, influence the purchasing behaviour is one that in broad terms I would accept because that underpins the argument for saying that if we can reduce the rate of VAT, then that might help precisely to those ends. Clearly, because both potential from reduced rate of VAT and the role potentially of selective product charges was part and parcel of the set of responses we had to the consultation, we are considering in the round the degree to which encouraging price differentials may play a part in achieving objectives that we want to see and we are considering clearly how to best and most effectively create those differentials.

David Wright: Thank you. I shall keep my eyes peeled on that!

Q33 Joan Walley: I would like to home in on some of the very immediate policies where we would like to see a shift of Treasury policy as a result of the pre-budget report and as a result of the consultation exercises you have just done and, given what you just said earlier about reduced VAT in relation to energy efficiency relating to domestic households, can I press you just for a moment on micro-CHP. Can I ask you first if you have read our eighth report on the Energy White Paper Empowering Change because, in that, we did make a strong case for looking at a VAT reduction on micro-CHP?

John Healey: I am aware of it.

Q34 Joan Walley: Can I follow that up and ask you - and I think you have also replied in a letter to me on this very issue - why it is that you have so far chosen not to reduce the VAT? Is it that you feel that you cannot do it under the European legislation on existing materials or is it that you are waiting to make an announcement at an appropriate time that you could not tell the Committee about now?

John Healey: First of all and formally, announcements like that are a matter for my boss, the Chancellor of the Exchequer. We are examining very carefully both the Committee's case for micro-CHP and the evidence that has been put to us from a range of quarters on this and I know that this is an issue you have followed particularly closely for some time as well.

Q35 Joan Walley: And shall continue to.

John Healey: I take that as fair warning! There are three dimensions that are part of any decision on micro-CHP. First is, do we have the vires? Can we, within the current structure of the reduced rates legislation on VAT in Europe do this for this particular type of product?

Q36 Joan Walley: My understanding is that, on that account, relating to micro-CHP you could.

John Healey: I am about to explain why my judgment at present - and we are still confirming this - is a qualified "yes". It is qualified because you may be aware that, as part of the VAT regulations in the legislative framework in Europe, there is the principle of neutrality and that is a determinant about what is legal and what is not. In other words - and this was what we were trying to argue on differential VAT rates for good energy efficiency products - legally, because of the principle of neutrality, we would not be able to reduce VAT on products that were in direct competition with other products on which we did not reduce VAT. So, the question - and we have not resolved this yet although we have had representations in from different directions on this - is, does micro-CHP constitute a product in which there is not a market competition with other products? In the context of any scheme to install micro-CHP which may be grant funded and contractor delivered, clearly that is in the market and we could and we have made provisions in the legislation for doing that in the past. The third element is the principles case and it is a question of, where we have introduced in some significant areas in the past that you will be well aware of progressively, Miss Walley, reduced rate on products or services designed to improve energy efficiency, it has been done on the basis that the principal and primary purpose of the material or of the product is to save energy, to be energy efficient. Clearly, with micro-CHP, that is an element of what that product is designed to do but is also designed to do other things.

Q37 Joan Walley: Are you disputing whether or not it is an energy saving product?

John Healey: No, I am not disputing that it is an energy saving product. I am saying to you that there is an area of question which is not simply and not solely an energy saving product. It is not the only purpose of micro-CHP. These are the areas we are looking at very closely.

Q38 Joan Walley: Would you agree that, even if it is not those two, its primary purpose is to save energy, so therefore it would qualify or it should qualify?

John Healey: Some might argue that an equivalent purpose of it is to generate electricity. It is after all a CHP unit.

Q39 Joan Walley: I do not know whether Mr O'Sullivan wants to come in there, but if we move on to the survey and the research that the Carbon Trust is carrying out and if we look at the other issues where manufacturers need to have some degree of certainty about the taxes and rates of VAT that there will be, are you saying that we would have to wait for the Carbon Trust research to be completed before you can consider whether or not it is principally energy reduction or principally providing electricity or are you telling us that there is a way where, if the Treasury so chose, at a time when it was appropriate to make an announcement, it could well go ahead with a reduced rate of VAT and that that would be compliant with the European framework that there is that determines the circumstances in which we can choose to reduce VAT?

John Healey: I say that we have not yet reached a position where we can make a certain judgment about the ---

Q40 Joan Walley: What would enable you to make a certain judgment?

John Healey: The work that we are currently undertaking in detail at the moment with a view to being able to make an announcement on this potentially as part of a wider package of measures to try and boost energy efficiency in the home around the time of the Budget. The Carbon Trust's programme is valuable. It is a pilot, trying to get 200 micro-CHP units into different households and then seeing what the effect is.

Q41 Joan Walley: We are not going to have to wait for two years for that research.

John Healey: In my judgment, we do not need to wait until we see the results of that. Having got the results of that, it would actually be rather useful in helping to give us greater clarity and certainty on these questions and it is important that the Carbon Trust pursue their programme. In my judgment, the bigger questions relate around being confident and clear that we have the legal vires to do this and confident and clear that we have a principle case on which to base this policy where we choose to adopt it. We are not yet in a position to do that but we are doing some intensive work on it.

Q42 Joan Walley: So, you expect to have a decision fairly soon on it?

John Healey: And I am aiming to be in a position to make a judgment on this. The Chancellor in the end will make the decisions around the time of the Budget because what is quite clear and what we are looking to try and do on a sort of budget and spending review timescale - and we were clear in the commitment that we gave in the pre-budget report and indeed all the groups that are interested and indeed this Committee would recognise that there is no one thing that is going to help us solve the problem with domestic energy efficiency, it is a combination of various spending programmes, programmes for utilities including potentially the role of economic and fiscal instruments - is put together the sort of package that will mean that this part of the policy territory, if you like, makes the contribution that we need it to make towards achieving the climate change goals, the contribution that we identified last February in the Energy White Paper.

Q43 Chairman: It sounds to me as though the timetable is being driven by a desire to announce at the time of the Budget rather than by lawyers who are having difficulty reaching a decision. It is perfectly respectable if that is the case. We all know that lawyers are capable of stringing anything out but this is not exactly rocket science, is it? It must be possible to reach a decision.

John Healey: I do not know how the lawyers would describe the situation but I think it is fair to say that, as policy makers and ministers, we are driving the lawyers in order that we can make the decisions on the timetable that we see as appropriate.

Q44 Sue Doughty: Very briefly because we touched on this on the floor of the House on 18 December and this is around the same area abut energy saving materials. In your response to me when I was asking about a reduced VAT rate of five per cent for supply and installation of energy efficient products and materials, you suggested to me that this could not be done. It is still my belief that the sixth VAT directive prevents a reduced rate of VAT on energy saving materials used for Do-it-Yourself, but there is no reason for not extending it to all products for energy savings that are installed by contractor under the current directive because this would be such a big incentive to contractors who do not have to wait for something to be announced because it would appear that it is already there in law to allow you to do it for materials installed by contractors. Can we revisit this one once again, please.

John Healey: It can for contractors, it cannot for DIY installation. The rules prevent us doing that which is why we have been arguing hard for two or three years now and in particular in this current round of reduced rates discussions. We cannot introduce a reduced rate of VAT on energy efficient products as things stand without changing those rules as well.

Q45 Sue Doughty: So, just to confirm the previous discussion you had with Miss Walley, if we know that it is energy saving installed by contractors, that is fine. If it is an energy efficient product, this is the area of greyness which we are trying to get to a resolution.

John Healey: The area of greyness is in particular connected with the proposition that micro-CHP boilers might attract a reduced rate of VAT of five per cent.

Q46 Sue Doughty: So, other energy efficient products such as central heating, hot water systems, controls and insulations would already be included as being eligible for five per cent VAT if installed by contractors?

John Healey: The legal advice is that we have the legal vires to do that under the current regime and indeed in some areas we have already done that.

Q47 Sue Doughty: So, will you be bringing that in?

John Healey: If we are going to take that any further, then that will be something we will consider and make an announcement about at the time, round about the Budget, when I hope we are going to be able to confirm a package of new measures and policies that will contribute to the aspirations that we have to see greater energy saving in the home.

Mr O'Sullivan: I think it might be worth explaining is that the way in which it works at the moment is if you are talking about something like installed central heating systems, you would not be able to specify the reduced VAT rate for particularly energy efficient boiler systems and the way in which it works at the moment is because the VAT reductions are available for schemes where there is grant support, we can specify within the grant that they will be appliances that need to serve an energy efficient standard. So, the way in which it has been set up has been to try and ensure that where installations or where a heating system is installed, we get the very best in terms of the energy efficiency rating being installed in those and that has been done by making this link to the grant scheme. There is scope in terms of EU legislation for evolving some of that but part of the way in which it was designed was to ensure that we get those energy efficient appliances being fitted by installers where we can give them a five per cent VAT cut.

Q48 Sue Doughty: So, that will fit within the grant scheme but, in terms of the generality ... Although I appreciate that, within the grant scheme, we are looking particularly at the fuel poor and that is right, it is not the only area where you can make those energy savings. I have always taken the view that the fuel rich are the ones who waste the most energy and anything that encourages them to reduce the energy they use has to be beneficial.

Mr O'Sullivan: Yes.

Q49 Mr Thomas: On housing, I want to ask you about the consultation announced in the pre-budget report on SIPPs, the self-invested personal pensions, and a proposal that, for the first time, these would include residential properties. What assessments are the Treasury making of the effect of that on the number of second or holiday homes?

Mr O'Sullivan: I do not know about this issue.

Chairman: Perhaps you could drop us a line.

Q50 Mr Thomas: Perhaps I could make a point on this issue to make clear the environmental impact and the sustainable impact of this. The proposal is of significant tax benefit for people who set up their own self-administered pension schemes to invest in residential properties: you get 40 per cent released if you are 40 per cent taxpayers; you get a 40 per cent rebate in terms of your investment; you will be able to rent the property and therefore will get a rent from it; and, when you sell it in order to put it into your pension plan, you will be able to get capital gains disallowance on that as well. To my mind, that is a huge benefit from the Treasury to the richest people in society whilst we are still trying to get first homes and sustainable first homes for many people in all parts of the United Kingdom and that the effect on an area like mine where we have 1,000 second homes that are not used for local people is plain to see and I would like to think that the Treasury is going to model the impact of this on particular aspects of the residential home market before it goes ahead with any such massive boost to the very richest in society who are not the people who are actually looking for sustainable residential homes at the moment.

John Healey: I quite understand Mr Thomas's concern about second homes in what is a very beautiful part of Wales. I have to admit that the potential environmental impact of the self-investment pension scheme had escaped me but, if the Committee will permit me ---

Q51 Mr Thomas: It is sustainable housing.

John Healey: I shall go back and examine that and perhaps I could write and set out our view for you.

Chairman: I would be grateful if you did write. I think we all understand that this is a slightly tangential issue.

Q52 Mr Challen: My question is on homes and it is also on VAT and I think I dread the answer. A year ago, we asked the Treasury to look at ending the perverse VAT incentive of building on greenfield sites and not brownfield sites due to greenfield sites being VAT free. The response from the Government was more or less in a footnote saying that this subject would be looked at under a continual review. That was 12 months ago, so I am just wondering what has the review helped us along with? Will there be an announcement shortly or are we going to have another 12 months of continual review?

John Healey: I hope my answer will not meet Mr Challen's expectations of dread! In fact, the Committee may be aware of the Kate Barker review which is looking at the question of supply and demand for housing and its implications right across the economy and for the policy of fiscal regime and the Committee may be aware that this is an element that she has looked at. She has produced an interim report in the run-up to the pre-budget report and aims to submit a final report to the Chancellor with further work during the course of this early part of the year. So, this is an element of the comprehensive and quite detailed look that she is taking of this whole question of supply of housing. Therefore, I think one might expect that issue not just to be, if you like, on the track of continual review, which of course we do with every element of the tax regime, but a part of a particular study that is being independently undertaken by Miss Barker.

Q53 Mr Challen: I do not quite understand why this review of VAT - and that was the answer we got, that it was a review of this very specific issue - should hang on another review which looks at all the spatial aspects, regional housing policy and all the rest of it. Why can this not be dealt with now in order that there is a level playing field at least?

John Healey: I think the reason for that is that those who would argue for perhaps a standard rate of VAT on housing goods on greenfields would do so because they are interested in the impact that that is going to have on the distribution, location and potential cost of home building. In that respect, it seems sensible to make sure that is part of what is the wholesale look at the challenges we face in providing enough homes in the right places within the UK rather than trying to treat something in isolation. So, that is why I suggest that it is the appropriate way of dealing with it and that is in fact where it sits at present.

Mr Challen: Except that we have other policies - PPG3 is obviously the most prominent of those - which have reversed decisions about greenfield sites and, coming back to this phrase, joined-up Government. We have had PPG on the books now for a couple of years and yet the incentives to build on greenfield sites are still there. So, this should have been tackled some time ago and I think that the Government should be able to report back to the Committee that they are going to do something pretty quickly on this matter because, whilst we are not doing anything, houses are being built and many of them are in the wrong place.

Chairman: Before you answer that, Joan Walley would like to say something on this issue.

Q54 Joan Walley: Before we leave this point - and it may be me who has overlooked it in which case I apologise - it would be enormously helpful if you could let us have a copy of the remit which was given to Kate in terms of the economic instruments aspect of the joint report which I believe was commissioned jointly by ODPM and the Treasury.

John Healey: Certainly. I will report back to this Committee on this issue as soon as I am able and, in the meantime, I will certainly make sure that the Committee has details of the remit Miss Barker is working to.

Q55 Mr Challen: I will now move on to the question of alternative fuels. In 2002, LPG counted for a mere 66,000 tonnes out of a total of 37 million tonnes of fuels accounted for, that is despite after having eight years of preferential duty applied to it. How could you explain what appears on the surface to be a complete failure and miserable failure of the policy?

John Healey: I would not first of all accept that it is a miserable failure of policy.

Q56 Chairman: We would not expect you to!

John Healey: Mr Challen, you will remember when we gave a commitment in Budget 2001, which was at that time pretty unprecedented in terms of the duty regime, that we would maintain the differential discount for LPG and CNG over other fuels, having done better than that and frozen them every year since. You might be aware that, since that time, the sales from road fuel gasses have grown from four million litres to 179 million litres. There are now 1,400 outlets through which it is possible to use and get LPG to fill up your car including my local filling station in Rawmarsh on top of Rawmarsh Hill. Alongside the significant commitment and cost that the Exchequer has been prepared to put in to encourage the development of this industry, the industry itself has invested, according to the LPG Association, more than £200 million over that period. So, this is an industry which is now much more widespread, it is a form of road fuel that is much more widely used by the motorist and part of the purpose of such a significant discount for LPG was precisely to try and help with establishing this industry and to recognise what inevitably were additional infrastructure costs, both in production and distribution, as well in costs in converting vehicles, if this was going to be a road fuel that would play its part in contributing to a greener environment.

In the absence of the Chairman, Joan Walley was called to the Chair

 

Q57 Mr Challen: I guess that part of the reason why so little of this LPG was sold is because, in your own area when you were the Green Minister with responsibility for Customs & Excise and Inland Revenue, a total of 58 LPG vehicles existed out of a fleet of 4,300. Is there any specific reason why the department has chosen not to go down that road?

John Healey: If the Committee would wish, I am happy to give the Committee the updated picture in terms of the Government car fleet. I suspect that, like any fleet manager, the replacement of vehicles generally is done on a three-year basis, so it is a process of replacement.

Q58 Mr Challen: But 58 vehicles out of 4,300 does not sound like a three-year rolling programme to me. Perhaps they cannot get to your local LPG station.

John Healey: As it happens, my own vehicle is due to be replaced within the next few months and what I find quite interesting is that the decision about which vehicle we go for in part is mine. So, I feel a particular responsibility to try, if indeed the figure stands at 58, to increase that over the next few months.

Q59 Mr Challen: Except that you would not really because the Government are going to start withdrawing this preferential rate and that particular fuel does not look quite so attractive any more.

John Healey: The reason in the pre-budget report that we signalled that we would, over the next three years, increase the level of duty for LPG towards the point at which it was more appropriately pitched was that as part of what we also published in the pre-budget report was this framework for all alternative fuels. Our principle purpose in making tax decisions about duty rates is based on the degree of environmental gain that we can get from a particular green fuel. LPG clearly can deliver some environmental benefits and particularly where the conversions are properly done, those can be significant. However, the majority of vehicle conversions are not done through the power shift programme, four and five are not done through the power shift programme. Some of those 80 per cent are certainly done by reputable converters and are done to a high standard, but there is a significant proportion of those which are done in a substandard way which can mean that in fact the environmental performance of LPG converted vehicles when they are not done properly is actually worse than the comparative fuels that we take as our benchmark. Crudely, we need to move to a point after a period in which the duty discount that we have offered, which is certainly the most generous in Europe, almost double that in Germany and France, five times that in Italy, all three countries which have a fairly well developed LPG market, was in place to help this industry establish itself to a point where we need to have duty rates and the cost to the Exchequer and the public purse, the taxpayer, set at an appropriate level that meets or, if you like, matches the sort of environmental gains we get from the use of LPG.

Q60 Mr Challen: Just turning to vehicle excise duty, I think everybody on this Committee welcomed the differentials that were introduced, although it seemed to work downwards. The previous standard rate was not increased for larger vehicles, was it? The differentiation came lower down the scale of engine sizes. Do you have any plans to increase that differentiation? At the moment, we have categories of AAA and AA. Can we start seeing some B- and Ds for the SUBs and other gas-guzzling vehicles in order that we have a much broader range of duty on those vehicles?

John Healey: I think the decisions you are talking about were made and announced in the Budget rather than the pre-budget report last year and we did indeed introduce a lower rate for the very cleanest type of engine. We did get representations and we have started getting representations now and arguments made for increasing the rate at the top end of the most polluting. Those are arguments that we will consider in the run-up to the Budget decisions that the Chancellor will take.

Q61 Mr Challen: Lastly, can we just look at the alternative fuels framework where we have this proposal for a three-year rolling basis for setting these duties. Could that also be applied to vehicle excise duty and that kind of approach? Also, do you think that three years is long enough? The Energy Saving Trust, for example, suggested ten years as a more appropriate timescale in order that manufacturers and other people in the industry could actually plan long term and have a good idea of what is ahead having seen the example of LPG where it seems to be running out of steam, so to speak, in seven or eight years. Perhaps the industry ought to have a longer timeframe.

John Healey: I would like to make three points. Back to the LPG industry, it grew by 23 per cent in 2002/03 despite the uncertainty that was immediate about the decisions we might take at the end of that pledge period. So, I do not accept your characterisation of the LPG industry in decline and we certainly do not want to see the decision we take on duty responsible for the bottom falling out of that particular industry and market. Certainly on the framework, it is specifically to deal with the environmental gains that we can quantify and achieve through greater use of greener fuels. So, the framework is particularly for those fuels. As far as VED goes or indeed other tax regimes like the company car tax, we have indeed reformed them and restructured them in a way that encourages purchasing and use that is more environmentally friendly. The decisions we take on the structure and the rates of those are of a different nature and different timescale to fuel duties, so that the framework would not automatically apply to vehicle excise duty but clearly, having restructured vehicle excise duty and company car tax, we are as mindful of the need to give as long-term signals as we possibly can about rates and we have indeed done that on normally a three-year time horizon with company car tax rates because it helps those who are responsible particularly for fleet buying. Finally, on the question of three-year period, I suppose it is inevitable but, in a sense, I think we are in danger of losing sight of just how different and potentially radical this approach is compared to the way that Government previously used to conduct their spending and taxation decisions. This is the first Labour Government where we have had spending reviews and three-year spending commitments. With the NHS, we have made spending commitments right the way through to 2008. That is unprecedented in the history of the British Government where decisions have tended to be taken on tax and on spending bases on an annual cycle. In looking at framing this approach to alternative fuels, what I have been very mindful of are arguments that I have had from industry - for instance, those wanting to see support of biofuels development - that the duty rate discounts are important, the rate in other words is important, but a degree of certainty about the Government's commitment and the Government's long-term intent is actually, if you are looking at the potential risk of investing in such markets and production capacity in the UK, almost as important. So, what we are trying to do here is give a degree of certainty to not just the rates over a three-year period but a degree of confidence in the commitment that we have as a Government to supporting the development of greener fuels where we get the environmental benefits and that they justify it. That is really the purpose of the framework. Clearly, there are interests, commercial and green lobby groups, that would like to argue for a ten-year commitment but I have to say that a three-year commitment is a pretty significant departure from the way in which Government have generally done business and made decisions on taxation in the past. There is of course inevitably the electoral cycle that, over a ten-year period ---

Q62 Mr Challen: We do have much longer targets for all sorts of things, poverty or our carbon emission targets and introduction of renewables by 2010.

John Healey: I would suggest to you that the commitment that we are giving specifically to three-year discounts on the duty is of a different order to targets or aspirations that a government might set in policy terms.

Joan Walley: I think on this question of timing, it might be helpful if I tell the Committee that we do have a deadline for our session this afternoon, so I do think that you perhaps need to be aware of that and make a little more progress.

Q63 Gregory Barker: The landfill tax escalator. At the current rate of progress, it is still going to take at least nine years to get to the target of £35 per tonne. Why are you being such a slowcoach about this? When are we going to get it kicked up further?

John Healey: I would not accept that we were being a slowcoach at all. The decision that the Chancellor confirmed in the pre-budget report in 2002 that we would set very clearly the level at which we wanted to see the landfill tax take at £35 per tonne reach in the medium and long term was a very significant departure from the escalator that, Mr Barker, you will be aware was introduced by the previous Government and continued for the first few years up until this year by this Government of £1 only per year. In a sense, the issue is similar to the point I was making to Mr Challen about duty discounts on fuels. The importance of those potentially making investments in waste management and waste disposal methods and facilities that we want to see encouraged in moving the waste stream away increasingly from landfill, the knowledge at which this is the rate that the landfill tax will reach is as important if not more important than a knowledge at this point about what the precise rate will be in 2006/07, 2007/08 and 2008/09. What we do know is that in 2005/06, it will go up by £3 a tonne and what we have said is that, in the years after that, it will go up by at least £3 a tonne.

Q64 Gregory Barker: So, why have all the submissions that we have taken from the industry told us that they want these rates to go up faster?

John Healey: Because it is in the direct and particular interest of that part of the industry to see the level of the landfill tax rise more rapidly.

Q65 Gregory Barker: So, can I take it that you are going to be ignoring the recommendation of this Committee and not increase it any faster or sooner?

John Healey: No, you cannot take that at this point. Clearly, the confirmation of landfill tax rates for the future will be a matter that is part of the proper budget-making process which the Government will consider and, where it is appropriate, will make announcements to confirm those in due course.

Q66 Gregory Barker: That is rather disappointing. Can you confirm that inert weights still only cost £2 a tonne to dispose of and does this not actually amount to a perverse incentive which directly conflicts with the objective of the aggregates levy?

John Healey: Inert waste is indeed at £2 a tonne and it is set to remain at that for the moment. We do not have a similar escalating style formula for that. I do not see that there is a direct contradiction between the landfill tax regime for the disposal of inert waste and the aims of the aggregates levy.

Q67 Gregory Barker: So, you do not have any plans to raise the rate?

John Healey: I have no plans at this point in the Budget cycle but clearly any consideration, let alone any decision, of landfill tax rates for inert waste will be taken as part of the Budget process.

Q68 Gregory Barker: Just moving to a different part of the waste hierarchy, it obviously makes economic sense that the high rate of landfill tax will drive some local authorities towards incineration and that is happening already, there are an unprecedented number of incinerators in the planning pipeline at the moment, and there is big concern that the landfill tax, rather than encouraging recycling and reuse minimisation which we all want to see actually simply just bumps users into the next cheapest option which currently by a country mile is incineration. Are you going to be bringing forward quickly any fiscal measures to actually maintain those differentials as the landfill tax goes up in order to prevent the next dirtiest option becoming the next cheapest option?

John Healey: I am not so pessimistic or take such a dim view of what we are beginning to see in the waste sector as you do, Mr Barker. With the prospect of the landfill tax increases that we announced just over a year ago, I see significant evidence that we are starting to see improving rates of waste minimisation and recycling in a number of areas. On the question of the fiscal instruments that may be appropriate for incineration, the decisions in that policy territory in my view need to be taken in the context of the work that is currently being undertaken - and I hope will be completed in the next few months - into the assessment and audit of the health and environmental impacts of different forms of disposal. I think it is only when we have a comprehensive evidence base across the piece that we are in the best position to make judgments such as whether or not it is right to maintain a differential between landfill incineration and whether or not we are right to introduce the policy that has been urged upon us by some of our international ---

Q69 Gregory Barker: So, only if there is a clear proven threat to human health will you be prepared to bring forward some form of financial disincentive towards incineration.

John Healey: No. I think that the members of this Committee would, as we have discussed in other areas, expect policy decisions to be taken in the light of first of all an assessment of environmental and health impacts and to reflect the relative costs of those in relation to any decisions about economic instruments, be they tax or otherwise, on different forms of waste disposal.

Q70 Gregory Barker: If incineration carries on growing at the current rates, that will not have an impact on your likelihood of introducing fiscal measures to keep a lid on that and diverting to other parts of the waste hierarchy?

John Healey: The principal purpose of our policies in the waste field are to try and encourage, as this Committee has examined exhaustively, greener, less environmentally-polluting methods of waste disposal and management. Where there are health elements to that, they must play a part in any responsible Government's judgment about those sorts of things. Quite frankly, we do not have a comprehensive and adequate evidence base to make those sort of judgments at the moment and I hope that the purpose of commissioning this work/study/audit will provide us with just that.

Q71 Paul Flynn: This Committee, along with the Government, has a great enthusiasm for a pesticide tax and in fact we said in 2000 that we thought it was more important than an aggregate tax and it did not happen and we had the voluntary initiative. We were then very critical in 2002 of the way that it was working or not working and particularly critical on the way that there seemed to be no way of measuring its success or failure. Are you happy now with the progress that has been made on the voluntary initiative?

John Healey: I think there has been some progress.

Q72 Paul Flynn: What is that?

John Healey: I think the Committee's judgment and critique of the voluntary agreements was useful at that time. It still remains the case that, at present, our judgment is that the best route of trying to pursue the impact we have on the pesticide use is through the voluntary agreement rather than ---

Q73 Paul Flynn: Could you spell out what progress you say.

John Healey: I can or rather I will ask Mr O'Sullivan to do that because detailed work has been going on within government.

Mr O'Sullivan: My understanding is that both the number of people participating in voluntary agreement has been increasing and they have been making progress on ---

Q74 Paul Flynn: Can I say to you that that is a very imprecise answer. Can you tell me what progress has been made. It may have been increased from one to two.

Mr O'Sullivan: I am unable to give a more precise answer.

Q75 Paul Flynn: You cannot answer it; perhaps you will come back to it and attempt to answer it at a later time. If we look away from pesticides to nitrate pollution which again is a matter of enormous importance, it is good news in the PBR because it contains a commitment to consult on options to tackle diffuse water pollution including consideration of the pros and cons of a role for economic instruments. Great. The bad news is that there was precisely the same commitment made in 1997 and nothing happened. Have we taken all this time to get nowhere on nitrate pollution?

John Healey: No, I think we are well ahead of where we were six years ago and the work on producing that set of proposals that we are looking to consult upon on diffuse water pollution is going on at the moment and I expect that we ---

Q76 Paul Flynn: The work started in 1997 and is still continuing?

John Healey: The work may have started in 1997 but we are at a point now which is different to where we were six years ago and we are close to being able to publish that consultation that the pre-budget report confirmed.

Q77 Paul Flynn: And the urgency is such that you start in 1997 and you are still continuing. I am grateful for that.

John Healey: The importance is such that we will be issuing this consultation, it will include the possible use of economic instruments including taxation as part of the measures that government might take to try and deal with this problem.

Q78 Paul Flynn: Can we look at the Government's attitude to farm tax, that is the tax that the Consumers' Association tell us is £16 per week that an average family has to pay for subsidies and other support for the farming industry. Are you satisfied that that is a permanent part of the fiscal system?

John Healey: No because clearly the Government have been arguing and have made some progress in reform of the whole agricultural support system which is largely driven, if you remember, Mr Flynn, from Europe. So, the short answer is "no". The supplementary to that is that we are working on it and I think Margaret Beckett has been making some headway in Europe.

Q79 Paul Flynn: Would it be fair to say that the Government, in the speed at which they give away taxpayers' money to the farmers, move at the speed of a striking cobra but, in imposing essential environmental taxes, they move at the speed of an arthritic sloth?

John Healey: It may be true that the pace of reform of the common agricultural policy at the European level moves with the speed of a sloth but I do not accept that characterisation of the decisions we take as the UK Government on fiscal measures at all.

Q80 Paul Flynn: If we look at the way in which compensation is paid to industry for the environmental taxes and this is done through money that is taken or denied to the national insurance fund and the chief beneficiaries of the national insurance fund are pensioners. The answer that I had recently to a parliamentary question is that the amount of money that is taken from the national insurance fund and denied to the national insurance fund in order to compensate for environmental taxes is running at £2 billion a year. Is it right that the expense of these taxes should be taken out of the pockets of pensioners?

John Healey: I do not accept the proposition that the national insurance fund specifically pays for the cost of environmental taxation. It makes it contributions in certain circumstances and at times to the general government revenues but that is it.

Q81 Mr Chaytor: I want to ask about the general environmental tax strategy but it is a little difficult because there is not one, is there?

John Healey: There is. It was set out - and we discussed this at this Committee this time last year - in the separate document that we published alongside the pre-budget report 2002: environmental taxation and the use of economic instruments.

Q82 Mr Chaytor: We had the statement of intent some years ago; we had the use of economic instruments; we were then promised an audit by the Treasury audit team into both operational matters and policy matters. That audit was promised for 2002 originally and then for 2003; has that been completed?

John Healey: The audit that I think you are referring to is part of the internal workings of management of any organisation. It is a different and very specific issue which is separate from the question of whether or not the Government have a convincing coherent strategy in relation to the environment and the use of taxation. In terms of the internal audit work that has been done in the Treasury, there have been a couple of stages to this and that has been going on over the last couple of years. As you would expect with any such exercise, it is essentially an internal management exercise but, if this Committee is particularly interested in it, then I would be very happy to try and provide a summary of the two stages of work and some of the main conclusions, if you like, that that work has produced. Indeed, an indication of, as you would expect, the sort of action that we are now putting in place to deal with what the audits have revealed.

Q83 Mr Chaytor: That would very useful because I do not think that the document on the use of fiscal instruments is a strategy as we would understand it or as other departments produce a strategy. It does not have necessarily clear objectives or targets. For example, can you tell us now what proportion of total revenues to the Treasury are taken in from environmental taxation?

John Healey: I cannot tell you what the overall proportion is; I can provide a figure in terms of the take of particular environmental regimes. The climate change levy, for instance, is bringing in now around £900 million a year. The document that we published a year ago was, if you like, a framework and a set of principles for how we, as the Treasury at the centre of government, would approach the policy question of whether or not for any specific environmental purposes and ends we would consider the use of economic instruments including tax to achieve those and, to that extent, it was designed not to specify, because that is not the place to do it, how we are going to tackle climate change challenge but to set out, for policy makers and those interested in influencing policy makers, the evidence base that we would look to try and establish in order to make judgments, the process of consultation that we would go through, the principles on which we would try and evaluate the options that were put to us and so, in that sense, it is a strategy and framework for making the sort of decisions in particular policy areas that we have to make. That is why I would suggest to you, Mr Chaytor, it is an important document because in a sense it opens up the process for making the decisions that the Treasury makes, and it makes clear also both the way that any interest group or indeed policy maker in this House can seek to play a part in that, and it tries to make clear also the basis on which we will try and evaluate and then take the decision we need to take.

Q84 Mr Chaytor: In the original Statement of Intent on environmental taxation there was a very clear commitment to shift the balance of taxation from taxing the economic "goods", labour and wealth creation, to taxing economic "bads", pollution, congestion, and our concern is that that shift has not really taken place. This is why I am interested in pulling out the figures of the proportion of tax-take which comes through environmental taxation now, because the information we have is that this shift from taxing the "goods" to the "bads" has not really taken place, hence our frustration about the slow pace of decision-making on energy efficiency, the approach to aviation policy and so on. My final question, because I sense we are under some pressure here, is do you still envisage that in the years ahead this shift in the balance of taxation will continue to take place, that the proportion of the overall tax-take from environmental taxes will continue to increase?

John Healey: The principle that we are looking to, the polluter pays, that we want to do more to tax "bads" rather than "goods", holds fast, and I would disagree that you can say there has not been a shift in that direction. Whether you look at the aggregates levy, whether you look at the climate change levy, whether you look at a number of other policy issues, you see precisely that characteristic. So it remains a central principle, confirmed in that document a year ago, of the approach we take to these sort of questions and indeed that we take to aviation and how we make sure that the aviation industry as an environmental polluter pays its way.

Q85 Joan Walley: Thank you for that. As I feared, time has caught up with us and I am afraid we are going to have to bring our proceedings to a close now. I would like to thank you for coming here and being a witness this afternoon. There is a lot of ground we still have not covered and, as I bring everything to a close now, I just wonder how best we can make up that ground. Certainly you have offered to send us some details of the framework and various other bits and pieces which will help to clarify the situation. I hope the Clerk and yourselves have a note of that because I think that will be helpful. What we are really concerned to see is how we can keep the pressure on the Treasury to get not just a policy framework but to really make sure that the Government does get a strategy on these environmental issues, and it is that which we will wish to continue exploring with you obviously in the near future through correspondence. We thank you for coming along today and certainly we have great hopes that we do get in your future announcements that there will be some further progress we can all welcome and applaud. We would like to think we have played our part in moving towards a proper environmental policy. One last thing: in respect of the number of officers you have in the Inland Revenue responsible for green issues, you might like to also include in your reply to us why you have only one officer and what contribution they can make towards sustainable development, but I think we will have to leave that for a written reply.

John Healey: Certainly. I will also include for the Committee a comparison between the number of officials we have in the Treasury compared to some of the other Departments, which you might find interesting.

Joan Walley: I think we are just concerned with the Treasury! Thank you very much.