Select Committee on Environment, Food and Rural Affairs Eighth Report


4 A possible pesticides tax

Background to environmental taxes

65. One possibility often floated as a means of reducing pesticide use is the introduction of a tax on pesticides. The Government is committed to reforming the general tax system "to increase incentives to reduce environmental damage" and "shift the burden of tax from 'goods' to 'bads'".[122] To date, environmental taxes have been introduced for aggregates and energy, but not for pesticides. The case for government intervention is summarised in a report recently commissioned by Defra:

While there are existing regulations and policy instruments (such as the VI) that seek to control impacts, the impacts to the environment and human health from pesticide usage themselves are not currently captured within the price that farmers pay for pesticides. These impacts are, therefore, said to be 'external' to the price signals faced by farmers and, thus, the market for pesticides.[123]

Defra and HM Treasury reaffirmed to us their belief "that well-designed environmental taxes and other economic instruments can play an important role in ensuring that prices reflect economic cost and discouraging behaviour that damages the environment".[124]

66. The Government has commissioned two major studies on the possible operation of a pesticides tax. In 1999, ECOTEC Research and Consulting produced a report for the Department of Environment, Transport and the Regions on a Design of a Tax or Charge Scheme for Pesticides.[125] The tax proposed by ECOTEC was complicated, with pesticides put into different bands of tax rate according to their intrinsic hazard. The more recent study, carried out by the consultants Risk and Policy Analysts, considered a number of key design issues for potential economic instruments.[126]

'Polluter pays' principle

67. We have previously questioned whether it was equitable for some costs, including those of cleaning up agricultural pollution, to be included in water charges.[127] We have suggested that the Government should consider addressing such costs in other ways, under the 'polluter pays' principle.[128] In the course of our present inquiry, the Soil Association advocated applying this principle, asking why the costs of pesticide pollution in water should fall on society as a whole, rather than on the industry producing the costs.[129] The NFU denied the suggestion that the polluter was "the industry per se", since there were "many within the industry who are very good practitioners".[130]

68. HM Treasury qualified the Government's support for the 'polluter pays' principle, explaining that it was subject to "meeting tests of good taxation about the distribution implications, the fairness, the impact on competitiveness and whether it is the most cost-effective way of achieving the environmental outcome that you want".[131] HM Treasury also noted the difficulty in identifying the polluter, since pollution in water was coming from a small number of people who were misapplying pesticides, rather than from every pesticide user. Therefore, a tax would penalise the "majority of farmers, for the actions of those who are misapplying it".[132]

Costs of cleaning water

69. One area in respect of which it is argued the polluter should pay is pesticide contamination of water. Estimates of the cost to the water industry of cleaning up pesticide contamination varied markedly in the evidence we received. It was, therefore, most helpful when Defra clarified the situation in its oral evidence. It told us that the figure of £120 million, frequently cited as being the cost of taking pesticides out of water, was associated with the initial capital costs of putting in place the equipment required to meet the demands of the Water Framework Directive. Defra's estimate for the costs to industry of cleaning up pesticide contamination in 2000 worked out at around £10 million a year for capital expenditure and a further £9 million for running costs, including the replacement of carbon filters.[133]

Design issues

70. In discussing the possible imposition of a pesticides tax, a number of issues arise about the best way of designing such a tax. Several of these issues were addressed in the course of our evidence.

Rate of tax

71. Some witnesses expressed concern that, since pesticide use is, in economic terms, inelastic, a tax would have to be set at an unreasonably high rate in order to be effective. The CPA argued that very high tax rates of around 30% would be needed to change the level of use.[134] PAN-UK considered that "applying a pesticides tax, just to try and change behaviour, would not do that very convincingly unless you put on such high levels of tax that you risk damaging British agriculture".[135]

Banding

72. The possibility of designing a tax so that different rates applied to different pesticides—'banding'—was also discussed. The RSPB regarded a banded tax as being the "best design" for a pesticides tax and the Soil Association suggested banding could reduce the toxicity of the pesticides in use.[136] The ECOTEC report found the biggest drawback to banding was the complexity involved, particularly in terms of categorising pesticides into different bands and resolving the boundary issues between those categories.[137]

73. The RSPB illustrated how difficult it would be to make such a categorisation. It noted that:

Those pesticides which are most potentially damaging to human health are not always the same pesticides that would have the biggest impacts on wildlife, and they are not always the pesticides that most easily find their way into watercourses. So you have a complicated system where different pesticides are good and bad along different axes.[138]

PAN-UK said that, even with a banded scheme, "it is likely that some anomalies will be generated whereby the tax system encourages moves towards less desirable pesticides".[139]

74. HM Treasury told us it did not have a clear position on whether a banded approach was favourable and admitted it had "not done a detailed assessment" of what the administrative costs of a tax would be, although it suspected that a banded tax "would almost certainly be more administratively complex" than a flat rate.[140] The RSPB felt the Treasury ought to be doing work on the design of a tax.[141]

Hypothecation

75. 'Hypothecation' involves the earmarking or ring-fencing of tax revenues for a specific purpose. All the witnesses advocating a pesticides tax were united in calling for the revenues raised to be hypothecated back into agriculture, to pay for pesticide mitigation measures. FoE believed that money raised by a pesticides tax should be used to:

The RSPB also stressed the importance of hypothecation, saying it "would not support a tax that just took money out and gave it to the Treasury. That would just clobber the farming industry".[143]

76. Both Professor Dent and the Soil Association questioned whether the Treasury would accept the principle of hypothecation.[144] However, HM Treasury seemed open-minded on the issue. Officials explained that hypothecation could be a difficult issue for Treasury ministers, in terms of providing the best value for money, but then went on to give existing examples of revenue recycling within the aggregates levy, the climate change levy and increases in landfill tax. HM Treasury officials concluded that hypothecation would involve "a difficult ministerial judgment", but that it was "certainly something that we have been willing to think about and have done in other instances".[145]

Experience from other countries

77. Pesticides taxes have already been implemented in several other European countries, including Belgium, Denmark, France, Norway and Sweden. Of these, only France and Norway have applied differential tax rates, banded according to the health and environmental risk characteristics of the product. Under the Norwegian scheme, revenues have been recycled back into the agricultural sector through fiscal support for the implementation of a pesticide action plan. In Denmark and Sweden, some monies have also been earmarked for ecological farming measures and pesticide reduction activities. However, in most other instances, revenues have been channelled into the general state budget—that is, they have not been hypothecated.[146]

78. In summarising the European experience, AIC claimed that "nobody can conclusively say that a pesticides tax has resulted in a lowering of usage of pesticides".[147] It suggested that, in the countries where a tax had been imposed, any beneficial environmental results had been achieved by complementary measures similar to the VI approach in the UK rather than by the tax.[148] FoE, on the other hand, argued that the Scandinavian experience had shown pesticide taxation could be an effective tool.[149] As an example, FoE cited the case of Sweden, which was said to have estimated that the risk to human health from pesticides had reduced by 77%, between 1997 and 2001, and the environmental risk by 63%, over the same period.[150] The Soil Association also noted that after Norway introduced its banded tax in 1999, there was "a slight annual decrease in pesticide use" and the products used seem to have changed "in favour of less hazardous preparations".[151]

Problems associated with a tax

79. Evidence suggested that a pesticides tax might burden farmers unduly. The CPA estimated the tax burden at £120 million a year and claimed that it "would be passed on to farmers" who, unable to pass it on to their customers, would be put at a significant competitive disadvantage in EU and world markets".[152] The Countryside Alliance cited analysis carried out by the NFU on the impacts of a tax. This analysis suggested that, "for a typical general cropping farm, the reductions in gross margins would translate to income loss of between 13% and 60%".[153]

80. Witnesses from the farming and crop protection industries all felt that introducing a tax would undermine the VI and other non tax-based measures already in operation. The NFU said a tax would be "a very, very counter-productive measure" and thought, if it were imposed, farmers would question the point of improving their practices.[154] The Countryside Alliance also thought a tax could have a perverse effect, working as a "disincentive to the use of up-to-date chemicals" and, in fact, "creating an economic incentive to use older, less environmentally friendly chemicals and techniques, in an attempt to minimise input costs".[155] The AIC echoed those fears, describing how farmers might "shift towards cheaper products which could be more environmentally harmful".[156] The AIC also suggested that farmers would feel they had paid for a "right to pollute" and Professor Dent warned that a tax "could do more damage than good".[157]

81. There was also a feeling from the agricultural and agrochemical organisations that a tax was a blunt instrument.[158] This position was supported by HM Treasury, which said:

If you had a straightforward tax you would have some impact on the overall level of pesticides used, depending on how you price it, but that would have none of the behavioural changes, in terms of how pesticides were being applied, that you were trying to achieve.[159]

The Minister also described a tax as "a crude and blunt instrument which would be paid as much by those who were undertaking those professional activities which reduced the amount of substances that run-off from the farmyard, for instance, as it does those who fail to undertake such good practice".[160] He emphasised that a pesticides tax was "not under active consideration" because the results of the VI were "more demonstrably successful than we think the blunt instrument of a tax would be".[161]

Our conclusions

82. We recognise that there is a possibility that a pesticides tax will be imposed. However, considerably more work is needed to explore the possible design of such a tax before we can adopt a firm position with regard to its imposition.

83. We were told that a pesticides tax could lead to environmentally perverse behaviour, but that this might be resolved with banding. Conceptually, a properly designed banded approach to pesticide taxation seems advantageous, since it should create an incentive for pesticide users to switch to less environmentally hazardous products. However, before the potential of such an approach can be properly assessed, several practical issues, including possible administrative complexity, need to be resolved. We recommend that the Government undertake research to define the criteria and methodology for categorising pesticides into different bands. Furthermore, if the Government regards a banded pesticides tax as a credible policy option, it must also carry out a detailed evaluation of the administrative costs that would be involved.

84. Hypothecation is another important design issue for a possible pesticides tax. We welcome the Treasury's open-mindedness about the prospect of revenue recycling, or hypothecation, for environmental taxes. Funds are needed to pay for the full spectrum of measures required to minimise the environmental impact of pesticides. To raise revenue to pay for these measures, we recommend that the Government should consider a hypothecated tax on pesticides. We strongly believe that the only justifiable reason for imposing a pesticides tax would be to raise funds to pay exclusively for pesticide mitigation action. If the revenues raised from such a tax were not to be hypothecated, then the adverse financial impacts on farmers would make levying a tax unjust.


122   HM Treasury, Statement of Intent on Environmental Taxation, 2 July 1997 Back

123   Risk and Policy Analysts, Review of Key Issues Related to Economic Instruments to Reduce the Environmental Impact of Pesticide Use, report to Defra, April 2004, Executive Summary, p 2 Back

124   Ev 114 Back

125   ECOTEC Research and Consulting, Design of a Tax or Charge Scheme for Pesticides, report to Department of the Environment, Transport and the Regions, March 1999 Back

126   Above n 123 Back

127   Environment, Food and Rural Affairs Committee, Nineteenth Report of Session 2003-2004, Water Pricing: follow-up, HC 1186, para 16 Back

128   IbidBack

129   Q 171 Back

130   Q 98 Back

131   Q 341 Back

132   IbidBack

133   Q 342 Back

134   Ev 4 Back

135   Q 128 Back

136   Ev 61, 62 Back

137   Q 344 Back

138   Q 172 Back

139   Ev 175 Back

140   Q 344 Back

141   IbidBack

142   Ev 49 Back

143   Q 172 Back

144   Qq 277, 178 Back

145   Qq 346-347 Back

146   Defra Review of International Experience with Pesticide Taxes 2003, quoted in full in above n 123. Back

147   Q 58 Back

148   Ev 21 Back

149   Ev 48 Back

150   IbidBack

151   Ev 74 Back

152   Ev 4 Back

153   Ev 170 Back

154   Q 93  Back

155   Ev 169 Back

156   Ev 20 Back

157   Qq 53, 271 Back

158   Q 15 [CPA]; ev 20 [AIC] Back

159   Q 321 Back

160   Q 326 Back

161   Q 339 Back


 
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