APPENDIX 6
Memorandum submitted by Friends of the
Earth
Friends of the Earth welcomes this opportunity
to respond to the Committee's inquiry. Our response focuses on
the headline questions posed by the Committee.
1. What new environmental policy measures
are there in PBR 2004?
There were almost no new measures in PBR 2004.
The Government announced a consultation process for a Renewable
Transport Fuels Obligation, which is welcome, a small R&D
fund for energy efficiency, and some very minor adjustments to
the tax structure for company cars.
2. How adequate are they in terms of the
environmental challenges we face?
PBR 2004 was wholly inadequate, for several
reasons. Most significantly, despite naming climate change as
one of six long term global economic challenges, PBR 2004 fails
to present a plan (or even a process to develop a plan) to manage
carbon emissions strategically across the economy. Given the urgent
need to get to a low carbon economy, the key role HMT has to play
and, as PBR 2004 notes, the importance of this year's climate
change programme review, this is extremely worrying.
Even at the level of individual policies that
address climate change, PBR 2004 announced a change that will
actually increase carbon emissions—the decision to freeze
road fuel duties. This decision also costs £500 million
a year, money which could have been spent providing decent alternatives
to motoring.
The combination of the lack of strategic leadership
and management on climate change and the economy, individual decisions
(including the Aviation White Paper and the watering down of the
already weak EU ETS) that appear to signal that beyond rhetoric
climate change is not a priority, and the lack of any plans for
integrating economic instruments and public spending demonstrate
how inadequate PBR 2004 is at dealing with this crucial issue.
3. Do the new PSA targets in SR 2004 adequately
reflect environmental priorities?
The inclusion of the Department for Transport
(DfT) in the PSA on climate change is very welcome. This agreement
should apply to aviation also, as a major growing source of carbon
emissions. DfT have yet to prove they are taking their new responsibility
seriously.
The ODPM target of cleaner greener spaces is
also welcome—a recognition of the poor quality local environments
many people live in, particularly poorer households.
HM Treasury should have an additional PSA to
manage carbon emissions across the economy.
4. How much of a real increase in funding
for these priorities has been made available; is funding now adequate?
DEFRA was given extra money, however given the
scale of the environmental challenges, particularly climate change,
the level of funding is disproportionately low.
Greater spending is urgently needed to tackle
market failures because the current approach is inadequate to
tackle problems such as climate change. Treasury acknowledges
the importance of tackling market failures, and the centrality
of their role in doing so. Tackling market failures is crucial
in today's societies, as so many decisions are controlled by markets.
The Government attaches a high priority to tackling three of the
four main effects of market failure—poverty, instability,
monopolies. However, the fourth major failure of markets—environmental
damage—does not yet attract anything like adequate Government
attention. There has been some progress on using economic instruments,
but this process is slow and it is acknowledged by almost all
commentators that environmental damage is not adequately reflected
in prices, and despite progress it will not be for many years.
This means that in the meantime, market failure will continue
to lead to over-exploitation of environmental resources. The response
to this should be for Government to make much greater use of the
other tools at its disposal. A key area is spending—to ensure
that for example new green technologies and industries grow far
faster than at present. It is inevitable that green solutions
will be slow to take off so long as their dirty competitors get
an unfair advantage through the continued market failure from
inadequately priced environmental damage.
R&D is a further area where spending is
needed for renewables. The UK R&D budget for renewables for
2001-04 was £18.5 million per year. However, these sums are
still dwarfed by comparison with nuclear spend which over the
last 25 years has averaged over £230 million per year.
In 1944, the USA's war economy was churning
out 9,000 military aircraft a month; the aircraft industry had
increased 50-fold within five years. In 2005 we are facing an
equally urgent task—today's equivalent should be the UK
churning out offshore wind turbines and other renewable technologies
just as quickly. A strategy of leaving this sort of action to
markets is not going to work—Government should revise heavily
upwards the amount of money it puts into the environmental economy.
5. What overall progress has been made since
2001 against agenda set out in 1997 Statement of intent on Environmental
Taxation?
Overall, the period since 2001 has been a failure.
After significant progress in 1997-2001, the Treasury's progress
has largely stalled. On the statement's commitment: "Over
time, the Government will aim to reform the tax system to increase
incentives to reduce environmental damage. That will shift the
burden of tax from `goods' to `bads'", Government statistics
show that since 2001 the burden of taxation has actually shifted
from "bads" to "goods"—environmental
taxation in 2003 stood at 8.6% of total taxation, compared with
8.7% in 2001, and 9.5% in 1997.
On the 1997 Statement that "growth must
be both stable and environmentally sustainable. Quality of growth
matters, not just quantity" the Government has also comprehensively
failed. There has been no attempt since 1997 to present a strategy
for delivering quality growth. Instead of meeting environmental,
social and economic objectives together, the Government repeatedly
treats these objectives as conflicting aims which can be traded
off, or "balanced". The Aviation White Paper is the
most egregious example of this policy—colossal environmental
damage justified on spurious claims of economic benefit. This
issue is also dealt with in the answer to question 8.
6. What successes and failures have there
been?
| Failures: | Road transport, Aviation, Pesticides
|
| Successes: | Landfill tax escalator, Renewables Obligation
|
| In the dock: | Emissions trading scheme, Climate change levy
|
| |
ROAD TRANSPORT—FAILURE
The failure to use economic instruments to achieve a more
sustainable transport system is the biggest failure since 2001.
The costs of motoring remain constant, while buses and rail costs
have soared, and walking and cycling remain marginalised and dangerous.
Even within the costs of motoring the incentives to buy low-C
fuels and vehicles remain inadequate despite moves in the right
direction (for example VED/Biofuels).
If HMT is to be successful on road transport it has to address
the two interrelated issues of price incentives and investment.
We welcome the fact the Government has been prepared in words
at least to considered a package of economic measures to address
this. Unfortunately, attempts to correct this situation have seen
the Government repeatedly back down to a vocal minority in the
roads lobby. The inadequacy of alternatives is a major barrier
to being able to sell the necessary increased motoring costs to
the public. The Government repeatedly fail to fund these alternatives
properly. It is exactly this type of complex policy area that
would benefit hugely from HMT taking a clear strategic cross-economy
approach to reducing carbon emissions.
On Vehicle Excise Duty (VED)—the Chancellor introduced
a partial reform of VED for cars—there is now a small reduction
for greener cars, and this move is welcome, as a means of creating
an incentive for greener behaviour at the point of purchase. To
be truly effective however this reform needs to be extended—with
increases in VED for more polluting vehicles, and greater reductions
for cleaner vehicles. Research from the Department for Transport
shows that wider differentials would have a major effect on consumer
behaviour.
AVIATION—FAILURE
Aviation still receives massive effective subsidies each
year from various exemptions from tax—on kerosene, VAT,
duty free etc. These amount to around £9 billion a year[4].
The artificially low prices that follow are directly responsible
for the planned growth in aviation which the Government has decided
to accommodate. The Aviation White paper states that "We
will work to ensure that aviation meets its external costs, including
its environmental and health costs. The aviation industry has
a responsibility to reduce its impacts under the `polluter pays'
principle. . .Economic instruments can help ensure that aviation
bears the external costs it imposes on society". There is
no justification for inaction here. However, the only solution
the Government proposes is to wait for the possibility of inclusion
of aviation into EU emissions trading some time to the back end
of this decade—this is far too uncertain, delayed and minor
to be an adequate response to the spiralling environmental damage
from flying. In addition, aviation's exemptions from taxation
would still require tackling even if the industry was within the
EU ETS—otherwise it would be getting a major competitive
advantage over other industry sectors who pay far more for their
fuel.
Other mechanisms can and should be used. Yet the only response
from Government since 2001 has been in the other direction—to
freeze rates of APD. Of all the sectors of the economy, aviation
has probably the least justification for receiving massive tax
breaks: removing them would be progressive, good for the environment
and would enable tax cuts in more deserving areas.
PESTICIDES—FAILURE
Very little progress has been made since 2001 on reducing
the damage to the environment from pesticides, largely because
the Government has abrogated its responsibility to a voluntary
initiative which is failing (see previous evidence to the committee
on this issue from Friends of the Earth and others). A pesticides
tax with revenues funding a support service for farmers would
be a more effective policy package, as is the case in a number
of other European countries.
LANDFILL TAX—SUCCESS
The landfill tax escalator, and the commitment to keeping
it in future years, is a success, and will help the UK meet its
EU commitments to reduce the landfilling of waste, although the
level of the escalator needs to be increased.
RENEWABLES OBLIGATION—SUCCESS
The introduction of the Renewables Obligation (RO) has been
a useful method for creating investment in renewable electricity.
The RO should also be extended beyond electricity to look at other
forms of energy—such as a Renewable Heat Obligation, and
a Renewable Transport Fuel Obligation.
CLIMATE CHANGE
LEVY (CCL)—IN
THE DOCK
Since introducing this ground-breaking levy the Government
has let the CCL wither—levels have been frozen, not even
increasing in line with inflation in Budgets 2002, 2003 and 2004.
However, it has at least survived in the face of intense lobbying
from industry groups. Credit must go to the Government for sticking
to the CCL but it needs to be reformed and made more powerful
to drive emissions reductions and spur innovation and efficiency
improvements. The structures are in place to allow this to happen.
To be more effective, the Government needs to commit to increasing
the Levy in future years.
EMISSIONS TRADING—IN
THE DOCK
The EU emissions trading scheme (EU ETS) is an important
development, which could potentially lead to major emissions reductions,
and have ramifications for many other areas of environmental policy.
Creating a market for carbon could also mean that Treasury takes
greater responsibility for action on climate change.
The effectiveness of trading schemes is however heavily dependent
on the number of permits allocated, and the way they are allocated.
On both of these issues there are major flaws with the EU ETS.
First, permits have been "grandfathered" to industry—effectively
granting licences to pollute, with more going to the heaviest
polluters—against the polluter pays principle. The main
alternative is to auction permits—as happened with the licences
for third generation phones. As well as being more equitable,
this approach would generate both revenue and lead to a higher
price per tonne of carbon, leading to more carbon reductions.
Second, industry groups have successfully lobbied for large initial
allocations, resulting in a very low price for carbon, blunting
the effectiveness of the scheme. It is hoped that in subsequent
years these flaws can be dealt with.
7. Has the Treasury developed an adequate strategy to
implement its environmental PSA objective? How could this approach
be improved?
The Public Service Agreement is: "Protect and improve
the environment by using instruments that will deliver efficient
and sustainable outcomes through evidence-based policies".
For the reasons set out above, we do not believe there is
an adequate strategy in place. No where is this more evident than
with climate change. We agree with the PBR 2004 that climate change
is a top-level economic issue, as well as the most serious and
urgent environmental concern. Given this, the lack of a strategic
framework within which packages of policies can be developed is
deeply worrying.
More broadly the current incrementalist approach to tackling
market failure is simply too slow to be an effective response.
Decisions today on house building, power generation, and transport
infrastructure affect the UK's emission profile for years to come.
It is right to develop economic instruments to tackle market failure,
but Treasury needs to acknowledge that this takes time and in
the meantime without other action, market failure will continue
to make environmental problems worse. Far greater and better coordinated
intervention is needed in the form of spending, regulations and
information, to steer the UK economy into a low carbon path.
We believe that this year offers a major opportunity for
the Treasury to pursue a more effective strategy, particularly
on climate change. The Treasury needs to become the lead department
on taking forward the climate change programme, and introduce
carbon budgeting for all sectors of the economy. The recent commodification
of carbon through EU ETS is also an opportunity for Treasury to
integrate carbon emissions into the national budget.
8. How adequate is the current approach to appraisal,
in particular the reliance on RIAs, as a vehicle for capturing
environmental costs and benefits and for balancing these against
social and economic impacts
The Government's current approach to appraisal is inadequate
in five ways:
— Compliance costs and negative impacts on competitiveness
are overestimated and the positive impact on innovation is underestimated;
economic benefits to other sectors (eg environmental technology
sector) are underestimated.
— There is a bias against adequate consideration
of longer-term, irreversible environmental impacts that tend to
be better defined by intrinsic value rather than purely price.
— Distributional implications are dealt with poorly
and in nearly all cases no account is taken of populations in
other countries.
— Future generations get a bad deal in the appraisal
of environmental, social and economic impacts, particularly in
issues regarding uncertainty.
— To compound these failings, in the process of
weighing up these impacts within appraisal, and Regulatory Impact
Assessment is a prime example, short-term commercial impacts within
the economy are given greater weight.
Time and again evidence has shown that pre-regulation costs
estimates by industry and Government are over-stated, sometimes
by an order of magnitude[5].
One of the main reasons for this is that these cost estimates
assume that industry does not adapt to the changes through technical
and organizational innovation. In reality environmental policy
measures stimulate innovation and can be designed to maximise
this benefit. These figures are usually accompanied by a barrage
of statements by industry organizations and lobbyists often asserting
that the regulation will be the downfall of whole industrial sectors.
Although these are not evidence to be used in the appraisal the
information asymmetry that exists between Government and business
about costs means they seem exert an unduly large influence.
Not all environmental impacts can be expressed adequately
in monetary terms. For example, the value of a blue whale or a
beech woodland is clearly not measured by the price of whale flesh
and oil or timber and land respectively—there is also an
intrinsic value. Although Government appraisal identifies that
this is an issue it offers no clear solution for how appraisal
methods founded on putting prices on things and then comparing
them does not either undervalue things with intrinsic value or
accord them less weight.
Recent work[6] commissioned
by Friends of the Earth from the University of Staffordshire has
examined whether distributional issues were adequately considered
in a number of different methods of appraisal used by Government.
This found that although distribution within the UK was considered
in most cases there was poor analysis and in nearly every case
no account was taken of populations in other countries or the
potential impacts on future generations.
Future generations get an all round bad deal from appraisal
such as RIA: longer-term, irreversible environmental impacts that
will impact most on future generations are marginalized by the
process; future generations are not considered in appraising social
impacts such as on distribution; estimates of impacts on business
routinely ignore the ability to innovative; and we still use a
discount rate that institutionalises, as the Green Book puts it,
the view that "society as a whole prefers to receive goods
and services now rather than later, and defer costs to future
generations".
To compound all these failings in the current approach to
appraisal, these methods, such as RIA, give greatest weight to
the immediate economic impacts and in particular to those directly
affecting the private sector. But if the evidence being presented
on these impacts is unbalanced and exaggerated then it is a recipe
for inaction and for stifling debate aimed at finding the best
policy solutions. Genuine competitiveness concerns need to be
addressed within the context of the benefits of well-designed
effective policy for people's quality of life and the environment.
Has the pendulum swung so far that even exaggerated business claims
can hold back the democratic process of making policy in the public
interest? If these issues go unchallenged and unchanged sustainable
development will not be delivered.
9. How could departmental approaches to appraisal (including
in the Pre-Budget) be improved?
PBR 2004 is alarmingly vague around the issue of appraisal.
Even at the most basic level of the policy objectives given in
Table 7.1 (within which appraisal will operate) are not specific,
measurable or time specific. For example, "tackling climate
change" as a policy objective provides no strategic framework
within which appraisal can operate meaningfully. It does not define
the extent of progress required, the speed with which it should
happen, by when and no sense of the contribution it makes to the
suite policies delivering on this aim.
In terms of the appraisal processes immediate improvements
could be made in the following ways:
— All environmental impacts identified as difficult
or impossible to measure adequately in monetary terms should be
listed along with the alternative appraisal techniques used in
each case and a clear assessment of how these are then to be compared
with impacts with monetary values.
— Evidence of compliance costs and the impacts on
competitiveness should be checked for accuracy (overestimates
of costs has been the norm), balance (have positive impacts been
considered in the same way) and relevance (the importance of international
competitiveness varies between sectors as does the aspect of business
on which it is focused—which for example could be quality
rather than price).
— Appraisal should be explicit about how it assesses
the impacts upon and of innovation.
— All departments should be provided guidance on
these two issues of innovation and competitiveness, not least
by summarising the evidence of how costs to business and competitiveness
are routinely overestimated and positive impacts upon innovation
underestimated- in order to correct this damaging bias in the
process.
— A separate section is needed summarizing how future
generations and people in other countries have been considered
in the process.
If these recommendations were followed and records of appraisal
are, as suggested by PBR 2004, available through the Treasury
website, this would be a step forward.
1 February 2005
4
Sewill, B, 2003. The Hidden Costs of Flying. London, Aviation
Environment Federation. Back
5
For example, International Chemical Secretariat, 2004. Cry Wolf.
Goteborg, ICE; and evidence to this inquiry from Environmental
Industries Commission. Back
6
Available on request. Back
| 
