Memorandum submitted by CBI
1. In 1997, the Treasury set out in its Statement
of Intent on Environmental Taxation that it would seek to shift
the burden of taxation from "goods" to "bads"
in line with the polluter pays principle. But data from ONS suggests
that, in percentage terms, the revenue from environmental taxes
has fallen to its lowest level since 1993. In view of the fact
that we are now approaching the end of the Government's second
term, what overall progress do you think that Government has made
against this agenda? What is the scope for further progress in
next Parliament?
2. To what extent do you consider that the
Statement of Intent, and the related document Tax and the Environment:
Using Economic Instruments (2002), sets out a strategic aim rather
than a specific strategy involving regular process of research,
target setting and monitoring? How could the Treasury's approach
be improved in this respect in order to underpin its environmental
PSA objective?
The CBI welcomed the Treasury's 1997 Statement
of Intent on Environmental Taxation and its elaboration in the
PBR 2002 paper, "Tax and the Environment: Using Economic
Instruments", in particular the emphasis on policy-making
supported by rigorous economic analysis and the commitment to
well-designed taxes that meet objectives without undesirable side-effects.
These documents outlined sound criteria for selecting and designing
appropriate policy instruments, including assessment of:
— effects on the competitiveness of
sectors which are subject to international competition;
— effects on competition within industry
sectors;
— compliance costs of implementing
and administering a measure, including cost to government and
to business and other groups; and
— distributional effects of a policy
on different groups within the population as a whole.
The Treasury also committed itself to reviewing
policies over time in consultation with stakeholders. The CBI
is aware that some progress has been made in this regard on individual
taxes. For example, HMT commitment to flexibility in policy is
evident in the:
— complete exemptions for electricity
generated from CHP or coal mine methane, and certain recycling
process, from the CCL introduced in PBR 2002, and
— widening of the criteria for access
to Climate Change Agreements beyond IPPC sectors in 2004—although
this does not eliminate all distortions in the CCL package, it
does allow some additional energy-intensive sectors to access
the discount on the CCL.
However, these changes to the CCL are largely
in response to business lobbying and fall short of meeting the
Treasury's stated aims, that is to review UK experience with environmental
taxes and to show "how the Government can meet existing and
evolving objectives in the most efficient way". There has
been little comparison of what environmental gains have been made
through the use of different instruments. Without knowing, for
example, how much greenhouse gas emissions have been reduced through
the CCL, it is hard to judge whether the levy itself, the negotiated
agreements or other initiatives like the Carbon Trust or enhanced
capital allowances are the most efficient and effective way of
meeting the government's objectives.
The Treasury should review its overall approach
to environmental taxes, in particular its monitoring procedures,
to improve the transparency and effectiveness of such taxes and
to amend where unintended consequences have occurred. Such a review
should include:
— assessment of role of environmental
tax within the broader policy context eg as move toward establishing
a market for carbon under the EU ETS, what is the continuing role
of the CCL?
— the effectiveness of taxes to-date,
against the objectives they were designed to promote and compared
with other policy measures;
— the lessons which can be transferred
from experience of one tax to another;
— quantification of the level of environmental
taxation in aggregate, within the broader context of UK taxation,
now and in future years;
— justification of whether the balance
of environmental taxes between business and non-business is appropriate;
— an assessment of the effectiveness
in maintaining the government's commitment to revenue neutrality
and how, in the event that revenue generated turns out to be greater
or less than expected, it manages that commitment in practice
over time.
3. Is there inconsistency in the way in which
the Government is implementing the polluter pays principle? The
government is, for example, increasing substantially the rate
of Landfill Tax, and yet appears to have rejected a tax on incineration—even
though the environmental costs associated with incineration may
be higher.
Following the Cabinet Office's Strategy Unit
2002 report "Waste not, want not", Government commissioned
two independent studies on the environmental and health impacts
and costs of municipal solid waste disposal (a science study by
Enviros and Birmingham University and an economic study by Enviros).
The findings of these two studies were summarised by HM Customs
& Excise in an attempt to value the impacts of different disposal
options.
While the HM Customs & Excise summary valuation
of costs shows that in the central case, environmental costs of
incineration may be higher than the environmental costs of disposal
to landfill, we believe that the Treasury's rejection of a tax
on incineration is the correct one for the following reasons:
— the HM Customs & Excise study
emphasised that there are significant uncertainties involved in
measuring and valuing the environmental effects of different waste
management options and that the estimates of the external costs
of landfill and incineration have wide margins of error attached
to them—sensitivity analysis shows that the external costs
of landfill could be higher than that of incineration if alter
assumptions with regard to fugitive releases of methane gases
from landfill or to the benefits of displaced power generation;
— incineration is currently a relatively
small component of waste management in the UK; and
— the increase in the rate of landfill
tax aims to incentivise producers to minimise waste arisings and
divert waste from landfill, helping Government to achieve its
legal commitment under the landfill directive to reduce reliance
on landfill—incineration has a role to play in achieving
this commitment and a tax on incineration could confuse the economic
signal to producers to divert waste from landfill.
4. Should the level of environmental taxes
be determined by the need to achieve policy goals rather than
simply by the scale of environmental costs (as indeed is the case
with the Landfill Tax, where the rate will increase far above
the environmental costs associated with it)?
The aim of environmental taxes is to internalise
the environmental externalities, thereby encouraging an appropriate
market response. Theoretically, therefore, the rate of environmental
tax should reflect the scale of environmental costs, rather than
policy goals. Where policy goals are not directly guided by environmental
costing, the Government's criteria for assessing different policy
options (outlined in point 2) are particularly relevant.
5. Do you consider that, as in the case of
fuel duty, there is greater scope to use environmental taxes as
major revenue earners? What should the balance be here between
environmental taxes and taxes on labour and corporate profits?
CBI supports the Government's commitment to
recycle revenue raised from some environmental taxes (eg CCL,
landfill tax and aggregates levy) as a way of ensuring broad revenue
neutrality, in keeping with the Treasury's intention to shift
the burden of taxation from "goods" to "bads".
However, the rise in employers National Insurance
Contributions, the primary means of recycling revenue from the
CCL and the landfill tax, has knocked business confidence in future
claims regarding revenue neutrality.
We recognise that there are practical and political
difficulties in demonstrating revenue neutrality, but to gain
business trust, Government must:
— elaborate how it aims to maintain
revenue neutrality over time; and
— improve data and transparency of
how revenue is being recycled to business.
6. Do you accept that there will need to
be large increases in the price of fossil fuel energy in order
to address climate change, and that the significant fall in the
real price of road transport and petrol over the last five years
will therefore need to be addressed?
There are a number of elements to the cost of
road use, including vehicle, petrol and insurance. When dealing
with environmental costs, Government needs to look at the effectiveness
of the range of policy measures in place, and determine the aggregate
costs to the motorist of these measures. The range of measures
include:
— incentivising change of behaviour
through price (for example, increase real price of petrol), however,
road use emissions are sensitive to traffic conditions that vary
by time and place, yet fuel duty is not particularly effective
as a way of encouraging efficient driver responses to such conditions;
and
— improvements in vehicle efficiency
(through changes in company car tax and voluntary agreements)—changes
in company car tax appear to be having some positive effect, but
the thrust of the government's approach has been to increase the
burden of taxation on use (eg fuel duty) rather than vehicle ownership.
Taxes paid by motorists raise approximately
£38 billion per annum, yet only £6 billion of this is
spent on transport—better targeted spend could reduce environmental
externalities associated with transport.
7. Evidence suggests that far more stringent
national targets will be required for Phase 2 of the EU ETS in
order to ensure that the EU meets its Kyoto targets. Would the
CBI oppose the setting of more stringent targets in the absence
of similar commitments by other industrialised countries outside
the EU?
Comparison of member states progress against
their Kyoto targets demonstrates that many EU member states are
far from achieving their Kyoto targets. The latest Commission
progress report on the European Climate Change Programme identified
that EU greenhouse gas emissions were only 2.3% below their 1990
levels, with 10 of the EU-15 "a long way off track from their
agreed share of the EU greenhouse gas emissions target."
The EU emissions trading scheme requires that
allocations are at least made in line with the traded sectors
contribution to each member states Kyoto obligation. In Phase
1 of the scheme, indications are that allocations have been generous
and that little progress has been made towards Kyoto. Far more
stringent national targets will, therefore, be required for Phase
2 of the scheme.
However, in setting targets at the UK level,
it is important to note:
— the UK is already on track to meet
its Kyoto target and the overall cap set for UK business sectors
in Phase 1 of the scheme goes significantly beyond the UK's Kyoto
target (even with the revised cap);
— setting the target for the traded
sector in Phase 2, should take into account:
— the competitiveness impact of setting
targets for the traded sector in the UK beyond those which have
been set by other member states—the UK should not be required
to significantly undercut its 12.5 per cent Kyoto emissions target
in order to help the EU meet their Kyoto target; other member
states must play their part in order to minimise competitive distortions;
and
— in setting the overall allocation
for the traded sector, the UK government should also take into
account action already undertaken and growth projections in the
traded sector; technical and economic potential for further emission
reductions by EU ETS sectors within the given timescale, compared
with potential in other sectors; comparative cost of achieving
reductions in these different sectors; and the impact on UK business
competitiveness, including on a sectoral basis.
February 2005
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