Government response
Recommendation 1. In the context of rising concerns
over the dangers of climate change, and of the fact that UK CO2
emissions are actually increasing once more, this year's Pre-Budget
Report was inadequate. This is all the more so considering that
the Government's Climate Change Programme Review was delayed to
take this Pre-Budget Report into account: the PBR does not hint
at the kind of measures that could put the nation back on track
to meet its 2010 target for reducing CO2 emissions. (Paragraph
11)
Recommendation
2. PBR 2005 signifies a continued slowing down of the Treasury's
momentum in turning its rhetoric on the environment into action.
No really significant new measures were announced, despite the
fact that this was the first Pre-Budget Report of a new electoral
cycle, and the even more important fact that UK CO2 emissions
are currently rising, not falling. In order to reassure Parliament
that it is taking its environmental responsibilities seriously,
it is vital that the Treasury publishes a high profile restatement
of its environmental strategy, and starts to back it up at once
with serious action. (Paragraph 15)
Treasury is fully involved in developing policies
to tackle climate change and is committed to implementing policies
to encourage cost effective emissions reductions across all sectors
of the economy. Since 1997 Treasury has taken a lead in developing
and implementing some important climate change policies. For
example, the Government introduced the climate change levy (CCL)
in 2001, on the business use of energy to encourage them to find
ways of reducing energy demand. Complemented by climate change
agreements and the Carbon Trust, this package helped reduce emissions
by 6.2 MtC/pa in 2005.
Existing measures were built upon in Pre Budget Report
2005 and Budget 2006. Pre Budget Report 2005 outlined funding
for loan schemes for energy efficiency investment in the SME and
public sector to overcome access to finance concerns. We estimate
that these loan schemes could contribute carbon savings of 0.2MtC
by 2010. Additionally it also outlined further decisions and plans
to introduce the Renewable Transport Fuel Obligation and £300m
extra funding to improve heating and insulation in pensioner households
which will have consequent carbon benefits. In Budget 2006, the
Chancellor announced a package of measures that would help put
the UK back on track to deliver continued and sustainable carbon
emission reductions. These included the intention to revalorise
the Climate Change Levy next year, reforms to vehicle excise duty,
£50m support for microgeneration and energy efficiency measures
for households. These complemented further measures announced
by the Secretary of State for Environment, Food and Rural Affairs
in the Climate Change Programme 2006. Taken together these measures
will help the UK exceed our Kyoto target and get closer to the
2010 target to reduce emissions by 20% from 1990 levels. Since
Budget, the Chancellor has addressed UN Ambassadors in New York
to highlight our support for multilateral initiatives, including
an extension of EU Emissions Trading Scheme beyond 2012 and the
World Bank's Energy Investment Framework.
In the 1997 statement of intent on environment taxation
and 2002 Tax and the environment: using economic instruments,
Treasury has already set out the basis of environment strategy,
and in particular the use of fiscal instruments. Pre Budget Report
2005 reiterated both our commitment to combining economic growth
with robust environmental protection and updated the principles
underlying Government action on the environment. Additionally
in preparations for the CSR 2007 the Chancellor has identified
climate change and natural resource protection as one of the main
challenges facing the UK economy. Treasury have been working
with other Government departments and external stakeholders to
identify on significant trends and implications under this theme;
and will widen this debate shortly.
Recommendation 3. In view of the compelling case
for more urgent action to reduce carbon emissions, we are concerned
that there may be a degree of institutional inertia within the
Treasury in the face of the scientific evidence on climate change.
We urge the Treasury to give greater priority to climate change;
and hope that the Stern Review will lead to a profound and consistent
impact in the seriousness with which the Treasury responds to
this issue. (Paragraph 16)
The Chancellor has identified climate change as the
greatest environmental challenge facing the world, one that could
have significant economic costs and jeopardize the development
of many nations. To further our understanding of climate change,
Sir Nick Stern was asked by the Chancellor to lead a review on
the economics of climate change. The Review aims to provide robust
analysis of the complex economic challenges around climate change,
and form a sound basis for good policymaking at the national and
international levels. In an important few years for global action
on climate change, the Review's findings should stimulate debate
and inform discussions in the Gleneagles Dialogue on climate change,
clean energy and sustainable development, and in the negotiations
under the UNFCCC. The Review will report in Autumn 2006 to the
Prime Minister and Chancellor.
Recommendation 4. We believe that the Treasury
should redefine Air Passenger Duty as an environmental tax. We
urge the Treasury to ensure that Air Passenger Duty rates more
accurately reflect the carbon emissions of the flights to which
they apply, to restrain demand for more flights and curb the growth
in carbon emissions from UK aviation. The Treasury should consider
changing the basis of APD, from taxing individual passengers to
taxing flights, so as to incentivise more efficient use of aviation
fuel and airport infrastructure. The overall aim should be to
ensure that this tax reflects the environmental externalities
of aviation. (Paragraph 22)
Recommendation 5. We applaud the leadership the
Government has shown in seeking agreement to include aviation
within the EU Emissions Trading Scheme. However, we would argue
that the UK can still take action in advance of this, and to supplement
it not just by raising Air Passenger Duty but, for instance, by
seeking bilateral agreements with other countries to impose aviation
fuel duty on flights between them. Furthermore, as the Environment
Agency argued in their evidence, simply including aviation within
the EU ETS is not enough-what counts is the level of carbon credits
it is assigned as a sector. (Paragraph 23)
The Government believes that aviation should meet
its external costs, and that the sector needs to take its share
of responsibility for tackling global warming. Inclusion of aviation
in the ETS is the most effective way to address the international
problem of aviation emissions, and would guarantee a certain reduction
in emissions across the scheme as a whole. APD increases based
on the current structure of the duty would not guarantee a certain
reduction in emissions, as a trading scheme does, and APD does
not incentivise improved environmental performance. The Government
is continuing to explore policy instruments to address emissions,
as well as driving forward progress on inclusion of aviation in
the ETS.
Taxation of fuel in some member states could lead
to tankering (re-fuelling in other locations to provide fuel for
internal trips or between particular countries). Carrying of extra
fuel can result in higher emissions.
The success of the ETS in reducing emissions from
aviation will depend on a number of design factors, and the Government
has taken an active role in discussions at EU level regarding
design of the scheme. A legislative proposal is expected from
the Commission by the end of the year.
Recommendation 6. We echo the Environment Agency's
support for the Renewable Transport Fuel Obligation, but also
its concern that expansion in the use of biofuels should not result
in environmentally valuable habitats, such as rainforests, being
cleared in order to grow the relevant crops. In the case both
of transport fuel and electricity generation it is important that
only biofuels which are from sustainable sources should be rewarded
with Renewables Obligation Certificates. We were heartened to
hear the Minister take such concerns seriously, and to refer to
work by the Department for Transport on assessing the environmental
impacts of biofuel sources. We may choose to monitor such impacts
ourselves as UK consumption of biofuels rises. (Paragraph 25)
The Government is very clear about the need to consider
sustainability issues in taking forward the RTFO. The environmental
policy purpose of the RTFO would be undermined if it were delivered
through unsustainable sources which not only damaged biodiversity
but also delivered little by way of life cycle carbon savings.
This is why the Government will make sustainability and carbon
reporting mandatory from the start of RTFO, and have commissioned
the Low Carbon Vehicle Partnership to develop robust carbon certification
and sustainability assurance schemes to form an integral part
of the RTFO. Work on both schemes is progressing well and key
stakeholders, including the major oil companies, biofuel producers,
and green groups, have been involved in their development.
While the RTFO is likely to be met at least in part
by imports, analysis shows that the UK could deliver 5% biofuels
from UK sources with no detrimental impact on UK food supply or
biodiversity. For example, the UK currently exports around 3m
tonnes of wheat annually. With advances in technology, it is estimated
that by 2050 the UK could produce as much as one third of its
transport energy needs from biomass.
Recommendation 7. We welcome the discount in
duty to support the growth in biofuels, and acknowledge the significant
impact that such duty differentials have played in the past, for
instance in incentivising the uptake of unleaded petrol and ultra
low sulphur petrol and diesel. Moreover, given that fossil fuels
will form a significant source of potential tax revenues for some
decades to come, but that we need to wean ourselves off them in
advance of their depletion and in order to avert dangerous climate
change, we believe that there is a strong case for consistent
increases of fossil fuel taxes. (Paragraph 26)
It is the Government's intention that main road fuel
duty increases at least in line with inflation each year to maintain
real value of public revenues and help meet our targets of reducing
emissions, but important factors like continuing volatility in
the oil market need to be taken into account, alongside environmental,
social and all other relevant factors. In addition, the Government
has adopted a long-term strategy of promoting lower carbon transport
including alternative fuels, improving fuel efficiency and giving
economic incentives to individuals to make more sustainable transport
choices. The use of fuel duty differentials has played and continues
to play an important role in that strategy.
Recommendation 8. We are concerned that the UK
is drifting away from the EU target on car energy efficiency.
The Government should increase the differentials within Vehicle
Excise Duty between the most and least efficient cars, and create
a special new band at the top of the spectrum for the worst "gas-guzzlers".
The Treasury should also raise consumer awareness by making vehicle
tax discs prominently colour-coded, to reflect their energy efficiency
banding. (Paragraph 28)
To strengthen environmental incentives, the Government
announced at Budget 2006 further reforms to VED. A new higher
band of graduated VED (band G), set at £210 for petrol cars,
has been introduced for the most polluting new cars (those above
225g of carbon dioxide emissions per kilometre). The VED rate
for the small number of cars with the very lowest carbon emissions
(band A) has been reduced to £0 to encourage take-up and
assist the development of the low carbon car market.
Recommendation 9. In view of the need to cut
carbon emissions, and of the likely long-term rises in oil prices
as we approach and pass global peak production, the Treasury should
develop a strategy for weaning the UK economy off oil, and should
publish updates on progress in each Pre-Budget Report. In addition,
each PBR should assess the nature and level of economic and national
security risks posed to the United Kingdom from the depletion
of world oil and gas reserves. (Paragraph 32)
The Energy Review will consider the long term trends
and risks in world energy markets for domestic energy policy and
the Government's energy policy objectives, which include ensuring
reliable energy supplies and reducing carbon emissions. The Review
will report to the Prime Minister in the Summer.
The Government's view on oil production prospects
is set out in the 2003 Energy White Paper "Our energy future
- creating a low carbon economy" http://www.dti.gov.uk/ energy/whitepaper/index.shtml:
"Globally, conventional oil reserves are sufficient
to meet projected demand for around 30 years, although new discoveries
will be needed to renew reserves. Together with non-conventional
reserves such as oil shales and improvements in technology, there
is the potential for oil reserves to last twice as long."
This is consistent with the latest assessment by
the International Energy Agency (IEA) in its 2005 World Energy
Outlook. However, we do not underestimate the challenges and,
like the IEA, the Government recognises that significant investment
will be required to turn these reserves into production. The UK
is therefore working with producers, consumers and the international
community to improve the conditions for investment in the international
energy sector. On the demand side, the Government is working with
developing countries to encourage more effective management of
energy demand, through energy efficiency improvements and the
development of renewable sources of energy. G8 Finance Ministers
have also been monitoring oil issues. Their latest communiqué
can be found at http://en.g8russia.ru/news/20060211/1143117.html
Domestically, the Government is working with the industry to maximise
the economic potential of our North Sea supplies.
All Treasury economic forecasts involve an assessment
of the economic risks to the UK and world economies, including
those arising from oil and energy markets, and the Department
of Trade and Industry will continue to monitor long-term prospects
for world energy markets.
Recommendation 10. On energy efficiency, we recommend
that the Treasury considers reducing both Stamp Duty and Council
Tax for those homes built or refurbished to high environmental
standards. At the very least the Government should give local
authorities the support to allow them to introduce their own Council
Tax rebate schemes, designed to incentivise household energy efficiency
improvements. Equally, the Treasury should do far more to join
up its policies on energy efficiency with those relating to improving
the productivity of British industry, and those relating to fuel
poverty. (Paragraph 35)
The Government notes the recommendation and keeps
all taxes under review. The Government has taken a number of measures
to promote energy efficiency in households, including reduced
VAT rates on a range of professionally-installed energy saving
materials, the Landlords Energy Saving Allowance, and the Energy
Efficiency Commitment (EEC). Such policies have supported households
to make cost-effective energy efficiency improvements and have
also helped to reduce the number of households in fuel poverty.
Half of energy efficiency savings under EEC must come from the
most vulnerable households, and the 2005 Pre-Budget Report announced
£300 million to help pensioners with the cost of installing
central heating in their homes. Local authorities are free to
offer Council Tax rebates for energy efficiency measures in conjunction
with energy suppliers if they wish, and a number have done so
in the context of the Energy Efficiency Commitment. Budget 2006
also announced £20 million over the next two years to help
local authorities and others work in partnership with energy companies
to promote and incentivise energy efficiency measures in households.
The Treasury's environmental tax strategy
Recommendation 11. In order to assist Parliamentary
scrutiny of its record, the Treasury should publish figures in
each Pre-Budget Report of the total revenues it receives from
the Climate Change Levy, Aggregates Levy, and Landfill Tax as
a proportion of the total taxes and social contributions it receives
from those businesses which are subject to them. (Paragraph 39)
The Government already provides details of receipts
derived from different taxes and national insurance contributions
in its Budget document. In Budget 2006, table C8 provides a breakdown
of the sources of current receipts.
Recommendation 12. We are far from convinced
by the Treasury's argument that the relative decline in levels
of environmental taxes could actually be a sign of the effectiveness
of its environmental tax programme (in that it might show these
taxes were successfully discouraging the activities they were
being levied on). Most significantly, environmental taxes are
failing to sufficiently discourage the processes and activities
that emit CO2. (Paragraph 43)
The Government has introduced a wide range of measures
to support its aims on the environment, consistent with the objective
it set itself in 1997. The Government reiterates its belief that
revenues are not necessarily a good indication of the relative
importance or success of environmental policy. Looking at each
of the environmental taxes in turn, in the case of the aggregates
levy, we have observed an 8 per cent reduction in sales of virgin
aggregate and an increase in production of recycled aggregate
between 2001 and 2003. The Government's policies on waste, including
the landfill tax, has seen a 28 per cent reduction between 1997
and 2005 in the total quantity of waste going to landfill, at
a time when the UK economy has grown 7%. The climate change levy
and climate change agreements (which offer opportunities for business
to reduce their liability to the levy) are key components of the
climate change levy package. This package is estimated to deliver
annual emissions savings of over 6MtC by 2010 - accounting for
a third of the UK's total carbon reductions.
Recommendation 13. Given that the Treasury has
accepted the principle of increasing taxes on "bads"
as opposed to "goods", and given that any new or increased
environmental taxes could be designed to be broadly revenue neutral
and fairly distributed, its reluctance to take bolder steps in
reforming the tax system is mystifying. (Paragraph 45)
The Government's 1997 Statement of Intent on Environmental
Taxation set out the Government's intention to reform the tax
system to increase the incentive to reduce environmental damage.
This Statement, and the Treasury's publication Tax and the Environment
in 2002, highlighted that any such efforts should take place within
a principled framework. In particular the decision to intervene
to achieve environmental aims must take account of wider economic
and social objectives and, if there is an evidence-based case
to for the Government to take action, the most effective instrument
should be used. Environmental taxes must also meet the tests of
good taxation.
Within this framework, the Government has introduced
fiscal measures that have played a key role in its wider environmental
strategy. To tackle climate change, the climate change levy package
(including CCL itself; climate change agreements; enhanced capital
allowances for energy-saving technologies) has been the main instrument
used to encourage businesses to reduce their energy demand. In
the household sector, the Government has introduced reduced VAT
rates for professionally-installed energy-saving materials, and
launched the Landlords Energy Saving Allowance to correct particular
market failures in the private rented sector. In the transport
sector, the Government has introduced the Company Car Tax, carried
out significant reforms to Vehicle Excise Duty, and used duty
differentials to encourage the development of environmentally-friendly
fuels. The Government has also introduced measures to tackle other
environmental issues, such as managing waste and protecting natural
resources. For instance, the Government has carried out significant
reforms to the Landfill Tax and introduced the Aggregates Levy.
These measures have supported wider efforts to protect
the environment and put the UK on track to meet its Kyoto commitment,
whilst also ensuring that progress towards wider economic and
social objectives—in particular, strong and stable economic
growth—is supported.
14. The Treasury cannot afford to leave it to
chance to get its wider messages on environmental taxes across
to the public: it should develop a coherent communications strategy,
possibly involving high-profile advertising campaigns. As a first
step, the Treasury should commission research into the public
awareness of the environmental purpose behind its taxes, in particular
fuel duty; this should provide a baseline to measure the effectiveness
of any communications strategy it develops. (Paragraph 50)
The Government recognises the importance of highlighting
the responsibility that falls to society to protect the environment
and the need for government intervention—through environmental
taxes and other measures—to correct market failures. As
such, the Government introduced a new chapter into the Pre-Budget
Report and the Budget Report that outlines how environmental taxes
can play to meet environmental objectives as part of a wider range
of measures. This chapter also emphasises the need for the development
of fiscal measures to take place within a principled framework
that ensures that any use of fiscal measures takes account not
only of environmental but also economic and social objectives.
More broadly, the chapter also outlines how domestic action—such
as use of environmental taxes—needs to fit with action taken
at the international level. In addition, the Government has regular
meetings with a range of stakeholders—including both environmental
groups and business organisations—to discuss environmental
tax issues.
The Department for Environment, Food and Rural Affairs
leads for the Government in raising awareness of environmental
issues and policy. It already supports a number of initiatives,
through bodies such as the Carbon Trust and WRAP, and intends
to do even more: for example, in late 2006, Defra expects to launch
Environment Direct as a new environmental information service
for consumers to provide simple information and advice about the
impacts of goods and services.
15. Moreover, the Treasury should be far bolder
in providing "carrots" which it can show to the public
are accompanying environmental taxes, in terms both of investments
in alternatives to the activities being taxed (for example, R&D
investment in new technologies) and of reductions in other taxes
or tax rebate payments. (Paragraph 51)
In line with the principled framework set out in
the Statement of Intent on Environmental Taxation, the Government
has introduced several incentives and support measures alongside
environmental taxes. For instance, as part of the climate change
levy package, the Government introduced climate change agreements
that provide an 80% reduction on a firm's CCL liability if that
firm makes specific energy efficiency improvements. A CCL exemption
has also been introduced to encourage the development of low-carbon
energy sources, such as combined heat and power (CHP), renewable
energy and coal mine methane. The CCL package also contains enhanced
capital allowances for energy-saving technologies, which provide
support firms investing in energy efficiency.
The Government has also introduced other support
measures that complement environmental taxes. For instance, in
PBR 2005 the Government announced additional funding for Carbon
Abatement Technology demonstrations, extra funding to explore
the possibilities of carbon capture and storage technologies,
and an extra £35m to offer interest-free loans for energy-efficiency
investments in the business sector. In Budget 2006, the Government
announced £50m of spending to develop microgeneration technologies.
16. We suggest the time is right for the Government
to reconsider establishing a Green Tax Commission. Without such
a body, the absence of a proper communications strategy to sell
its environmental programme to the public is all the more damaging.
(Paragraph 52)
The Government is committed to developing the environmental
tax agenda in an open and consultative way, encouraging the views
of all interested parties and trying to build consensus where
possible on the best way forward. Indeed, the Government has engaged
stakeholders and interested parties through a number of consultations
since 1997. In addition, the Government has introduced a new chapter
to Pre-Budget and Budget reports that covers environmental issues
and sets out the Government's approach to the use of taxation
within its environmental programme. This provides a regular and
detailed statement on the importance of tackling environmental
issues, the need for government action - using tax and other instruments
- to take place within a principled framework to ensure effective
action, and the impact of these measures to date and new measures
that are to be introduced.
17. We find it perfectly understandable for the
Government to argue that climate change is something which threatens
all nations and requires them all to take action, and the Government
is obviously concerned about the consequences of the UK taking
action in advance of the rest of the world. We are concerned that
the Treasury may not fully appreciate the significant export potential
of the new carbon mitigation technologies for the UK economy.
Equally, we are concerned that if the Government takes the line
of waiting for universal agreement before committing the UK to
take bolder steps, this will be a recipe for stasis. We fear that
there are not going to be any international agreements, or none
which result in truly effective action, unless individual nations
are prepared, to one degree or another, to move first. (Paragraph
57)
As the Chancellor has highlighted in recent speeches
analysts expect the global market for environmental technologies
markets to grow significantly. The Government has introduced a
number of measures to enable British companies to take advantage
of this. UK Trade and Investment provide advice and support for
firms seeking to export goods and services in the power sector,
including low carbon technologies. Additionally, ECGD supported
a £50m initiative to promote the export of renewables.
It has been argued by some that carbon capture and
storage (CCS)—in which CO2 is captured and committed to
long-term storage—may be one area where there would be benefits
for the UK in early adoption of the technology. The Government
has not reached any conclusions and, according to our principles
of environmental policy making, will only do so on the basis of
evidence. HM Treasury's consultation on barriers to the commercial
deployment of CCS will contribute to building the evidence-base.
Climate change is a global challenge and securing
co-ordinated multilateral action is key if the world is to avoid
the more damaging impacts of climate change. The UK is committed
to working with international partners to secure this action.
Equally the UK has taken steps to reduce emissions beyond the
current level of effort required by the Kyoto protocol. The Climate
Change Programme 2006 indicated that we are currently projected
to reduce greenhouse gas emissions by 23-25% from 1990 levels
between 2008 and 2012. The UK has also stated a long term 2050
carbon reduction goal if other countries take similar action and
the Energy Review is currently examining options to continue the
UK's progress to this goal.
Environmental business reporting
18. What concerns us about the way in which the
Treasury has taken the decision to abolish the Operating and Financial
Review is the wider attitude it suggests, one which seems simply
to oppose competitiveness and sustainability, and views sustainable
reporting as an optional extra which can be dispensed with lightly.
Our main concern following its abolition is that the Government
introduces a new reporting scheme which provides effective incentives
for UK listed companies to act more sustainably. We welcome the
fact that the Government has issued renewed consultation on the
form in which the new Business Reviews should take, and also the
Minister's confirmation that the Government is willing to consider
any representations on their merits. We may return to these Business
Reviews, and the form they finally take, in our inquiry into next
year's Pre-Budget Report. (Paragraph 64)
It should be clarified that the statutory Operating
and Financial Review (OFR) removed by the Government was not primarily
a reporting tool for sustainability. The OFR was a reporting tool
prepared by companies for the benefit of their shareholders to
help them in assessing the strategies adopted by the company and
the potential for those strategies to succeed.
Following public consultation on the full range of
options for narrative reporting, the Government has settled upon
the Business Review requirements as the appropriate reporting
standard. For quoted companies there will be some additional narrative
reporting requirements, to make clear what level of disclosure
is expected of them in producing a Business Review. As with the
OFR, the Business Review's intended audience is its shareholders;
its purpose is to help them assess how directors have fulfilled
their duties (to promote the success of the company). In so far
as it is necessary for an understanding of the development, performance
and position of the business, companies will be required to report
on matters related to sustainability. (It is worth noting, however,
that companies are not precluded from providing additional voluntary
disclosures, or indeed producing additional reports that focus
more exclusively on corporate social responsibility and sustainability
issues, where this is considered desirable).
19. The Government should ensure that, in examining
the economics of different options for tackling climate change,
it starts by deciding the level of carbon emissions it wants to
achieve, and then looks for the most cost-effective means of getting
there. (Paragraph 68)
The Government has already set a long term goal of
reducing carbon emissions by 60% from 1990 levels by 2050. This
goal is informed primarily by the science of climate change and
the goal acknowledges that a response has to be global by committing
the UK to this reduction if other countries take similar action.
In assessing different policy options for reducing carbon in
a manner consistent with this goal, evaluation of the carbon impact
as well as economic and social impacts are important to ensure
that the policy is fit for purpose. The long term nature of the
problem dictates that the Government assess a variety of policies
and possible technologies to different criteria.
20. We may review the impacts of the Climate
Change Programme Review, the Energy Review, and the Stern Review
on Pre-Budget 2006, and subsequent PBRs, to follow the extent
to which the findings of these Reviews: a) complement and not
contradict each other, and b) are translated into the Treasury's
environmental policies. (Paragraph 70)
The Treasury looks forward to the Committee's interest
in PBR 2006.
May 2006
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