Examination of Witnesses (Questions 140-159)
JOHN HEALEY
MP AND MS
BETH RUSSELL
31 JANUARY 2007
Q140 Mr Hurd: You still have 32 flights
to Manchester. Do you think you might get more popular support
for environmental taxation if there was a clear link and people
could see an effect, could see the money being recycled to some
more transparent environment gain? I am not getting obsessed with
railways but just so that the money is being recycled into some
clear environmental area.
John Healey: As I tried to explain
earlier on, in some cases, we have taken the decision that that
should be a part of the design or the changes we are making. But
in other cases we have not[1].
Fuel duty was introduced in 1928. It is well established. It is
categorised as an environmental tax because it has an environmental
impact as far as the Office of National Statistics goes. There
is a tax which has a crucial role in raising revenues for government
spending as well as potentially an important role to play in helping
deal with emissions and climate change.
Q141 Mr Caton: Transport 2000 have criticised
the effects of the zero VAT rating for the aviation industry which
lets airlines claim back the VAT they pay on various goods and
services. What does that cost the Exchequer and are you consider
ending what does appear to be an anomaly?
John Healey: No, we are not considering
ending it firstly because we have a manifesto commitment to maintain
the current zero rate the UK has on passenger transport. Secondly,
because like virtually every other Member State we treat aviation
in the same way as other forms of public transport for VAT purposes.
On the specific question of how much VAT costs, here we are talking
of course about VAT on domestic aviation ticketing and fares,
the standard rate on that in the UK would be about £160 million.
To put it in perspective, the total value of our zero rating for
public passenger transport fares is probably worth about £2.25
billion.
Q142 Mr Caton: You say we are in
line with other EU countries but when you are talking about domestic
flights we are one of only four countries that does not put VAT
on. Why is that?
John Healey: You may have knowledge
that I do not. I thought there were only two countries, ourselves
and Malta, that had a zero rate of VAT. Other countries may choose
to have differential rates. We are in a position where we have
a zero rate. We had a zero rate when we joined the European Community
as it was at that time in the early 1970s. We were allowed to
retain our zero rate and that is what we have done.
Q143 Mark Lazarowicz: How do the
sums that would be raised by VAT on domestic flights compare with
the sums that are raised on APD on domestic flights?
John Healey: I do not have the
specific figures for APD just levied on departures for internal,
domestic flights. I can certainly provide that for the Committee.
If I may say so, I think it would have such a limited impact and
be a significant change in the approach that we have taken both
to VAT but also to public transport fares that I am a little surprised
that organisations like Transport 2000 spend such time pressing
the case.
Q144 Mr Caton: Can we move on to
road transport? The Pre-Budget Report says, "Real costs of
motoring as a share of household disposable income have fallen
considerably in the last ten years, as incomes have grown on the
back of sustained economic growth, while motoring costs have remained
broadly constant." Over the same period, on the other hand,
the real cost of bus and train fares increased by 31 and 16% respectively
and very recently there has been another big hike in rail fares.
Should not the government be doing more to alter the balance of
affordability between private and public transport both for social
reasons and for environmental reasons?
John Healey: That is over simple
and an approach that does not really affect the central importance
in our particular country to road transport both for individuals
and families and also for the economy. To that extent, I do not
think it is possible to make that broad argument that the approach
should somehow be equivalent. The role that road transport plays
in our life, our society and our economy is quite different to
that of other forms of transport. In the UK, it is different to
the circumstances and position in other countries as well.
Q145 Mr Caton: Is not the reality
that fuel protests some years ago ended the Government's commitment
to the fuel duty escalator which was and could be a much stronger
environmental tax?
John Healey: The effectiveness
of tax on things like fuel often turns on its impact on price.
When any government is taking decisions about things like fuel
duty, we may have a concern about the environment. Clearly we
have a concern about the economy and the differential impact it
may have on different groups. If you look over the last three
years, because of world energy changes and oil prices, the price
at the pump of petrol or diesel has gone up by about 18 pence
a litre. That is a price effect with demand consequences, with
an impact on the environment that it is difficult to see, even
with an escalator in place, one would have achieved simply by
a fuel duty decision. The idea that you do not take fuel duty
decisions with a concern also for the economic or social impact
as well as the environmental gain that may be there is imperfect
and too limited a view of policy taking.
Q146 David Howarth: Is not the counter
to that that we are not going to meet the 20% reduction target
by 2010? Why did not policy change back to induce higher increases
in the price of fuel than the ones that the market produced by
itself? As the PBR says, even with the increase by 1.25 pence
per litre, the tax rate itself remains 15% lower in real terms
than 1999 when the escalator was abolished. Effectively, there
has been a real terms tax cut at a time where we are not meeting
important climate change objectives. Does not what you have just
said simply amount to saying that climate change is important
but it is not as important as other things so we are not going
to deal with it in this way?
John Healey: I appreciate your
party has a policy to reintroduce the fuel escalator. That in
my view does not make sufficient recognition of the potential
economic and social costs. I suspect its punitive effect, not
just on the average motorist and household but on the economy,
would lead to very serious problems should it ever be pursued.
You started with a point about the concern to see CO2 emissions
reductions. That was the purpose of the climate change review.
It is why there will be further policies that we put in place
as a result of the energy review. In part it is designed to try
and help us get closer towards the CO2 emissions target reductions
that we seek. All sectors have to play a part in that. The importance
of the work we are doing in government is to try and make sure
we use the best, most cost effective way to do that.
Q147 David Howarth: Is not the whole
point of the Stern Review that in economic terms the costs of
inaction are greater than the costs of action? Is this not also
one of those policies which would change fundamentally if the
Stern social costs of carbon were adopted across the board in
government policy, not just at the rhetorical level?
John Healey: Yes because Stern
says the costs are in the end only manageable if we build much
flexibility into the way that we reduce emissions and take policy
decisions and if we work principally internationally rather than
simply seeing our concern as to what is happening in the UK.
Ms Russell: It is also worth remembering
with regard to fuel duty that the level is already far in excess
of the externality level if it was just pricing carbon.
Q148 David Howarth: At the Stern
level at 2010?
Ms Russell: At the current level.
Q149 David Howarth: That is the point
I was trying to make.
John Healey: If one were simply
concerned to set the fuel duty at a rate that covered its climate
change externalities, you would be looking at a duty cut of around
40 pence per litre.
Q150 Dr Turner: The Chancellor reformed
Vehicle Excise Duty in the last Budget with a new band G for higher
emitting vehicles but abolishing VED for the lowest in band A.
We welcomed those reforms but we were critical because they did
not go far enough to have much of an effect on the market for
high end vehicles. It has been there for several months now. Have
you any evaluation of the changes and their effects on vehicle
sales?
Ms Russell: Not yet. It is too
early, although there is some indication that the number of cars
in band B has increased. We need to do further work on understanding
what exactly has been driving that. Apart from that, it is too
early to have any evaluation.
John Healey: The policy purpose,
using the VED system, reforming it in the first place and reforming
it further at the Budget, is essentially to send signals to motorists
at the point at which they are considering purchasing vehicles
rather than necessarily trying simply by price alone to drive
behaviour.
Q151 Dr Turner: Are you satisfied
with the great width of band G which includes quite modest vehicles
and goes up to vehicles which have the most gargantuan fuel consumption
of 10 or 12 miles per gallon? Do you think it could be subdivided
and have a more swingeing rate at the top end?
John Healey: We based our decisions
on where to set particularly the new top band on a level which
did not necessarily apply to only certain types of vehicle. We
wanted to ensure, even for those who need or choose to have 4x4s,
that there are models available with emissions performances that
do not bring them into band G but sit them in band F. It was an
attempt to introduce this new top band but to do it in a way that
also allowed people a range of choice over the purchases they
made.
Q152 Dr Turner: As for the renewable
transport fuel obligation, that has been criticised by Greenpeace
in particular because of the lack of control over the environmental
sustainability of the source material. Are you taking any steps
to guarantee that biofuels consumed in the UK come from sustainable
sources? Are you relating for instance the obligation and the
duty reduction to sustainable certification?
John Healey: We are taking steps
to try and deal with those concerns. The work is being led by
the Department for Transport. It is part of the preparations we
are making for the introduction of the obligation in 2008-09 that
we have some sort of carbon assurance system as a working concept
or title. There is clearly a case for that. We obviously want
to try and make sure that where biofuels are used and used increasingly
they deliver the maximum possible environmental gain and emissions
impact that we can achieve. You will appreciate it is not straightforward,
particularly when one considers the fact that any system like
that would need in time to be able to deal with imports of biofuel
which may be sourced and produced in a number of other countries.
It is one reason why the Chancellor is taking a step to try and
build what might be called a biofuels international partnership
which does involve discussions on precisely these sorts of questions
and work with countries like Brazil, a major biofuels producing
country, over how we can increase the use of biofuels in a way
to get the maximum climate change impact.
Q153 Dr Turner: Is the Treasury doing
anything to accelerate the development of second generation biofuels?
John Healey: Yes. We have been
prepared to put in place a provision within the VED system. We
have said that we will do work on how the obligation might count
and encompass the next generation of biofuels. Although they are
at a relatively early stage at the moment, we want to see the
mechanisms, whether on the tax or regulation front, that provide
the incentives to improve what we can get.
Ms Russell: Both ourselves and
HMRC are in very regular dialogue with the industry to understand
what new fuels are coming forward. We made some announcements
in the Budget extending the 20 pence duty differential to some
new fuels. We are looking in conjunction with the industry at
when new fuels come up and as to the case for including them.
Q154 Dr Turner: What is your estimate
of the penetration of the transport market biofuels so far? Are
the RTFO and the 20% discount having the effect of stimulating
much penetration? How much?
John Healey: We start from a low
base, particularly compared to some other countries. I think that
is important to recognise at the outset. The introduction of the
duty discount is clearly having an impact. The biofuels market
between 2004-05 increased fourfold. It looks as if it doubled
between 2005 and 2006. I think we are making some progress. Our
judgment has been—it is why we are now designing and preparing
to introduce the obligation—that the duty discount on its
own is not the best way to develop the market for biofuels in
the UK. The obligation, as you will know, means that in 2008-09
2.5% of the fuel market must be sourced as biofuels. By 2010-11
that is 5%. We see that as just a start. How we develop it and
see a greater proportion of our road fuel market coming from biofuels
will depend on a number of factors but I am confident that we
will deliver that type of market expansion and share. As we have
indicated from the answer to your previous question, we are looking
not just at 2010-11 but where we go beyond that as well.
Q155 Dr Turner: Have you modelled
the final aim for percentage of biofuels?
John Healey: That is difficult
to do because it depends on a combination of things. It depends
on developments in fuel design and production. It depends on developments
in engine technology, on cost and what is acceptable to the consumer
too. It depends on developments in fuel standards. I would not
necessarily want to fix an end point, even if it seemed intellectually
or technically feasible to do which it does not seem to me to
be at this point.
Q156 Joan Walley: In the Pre-Budget
Report it sets out something like a 25% reduction in terms of
waste sent to landfill sites since 1997, but we have been urged
to do more and more. Both Biffa and the Green Alliance told us
in their earlier evidence that the tax is still too low. Is it
too low and what are you doing to really isolate and assess the
effectiveness of the landfill tax in terms of disincentivising
the waste companies using landfill?
John Healey: First of all, the
annual increase that we signalled and have started to implement
of at least three pounds per tonne a year for the standard rate
has been important. It has helped to deliver what you have rightly
cited as the 25% reduction in what is registerable for landfill
tax being disposed of in landfill by 2004-05. It has also contributed
to the fact that local authorities in England are now recycling
27% of their domestic waste which is a tremendous achievement
when you consider that in 1997 it was only 8%. They should be
congratulated on that. We look as if we are therefore on target
to meet the European Landfill Directive target for 2010. The ones
beyond that are going to be more difficult. It is for that reason
in the Pre-Budget Report that we did say that we would consider
whether or not there was a case for changing the steepness of
the escalator. We said we would look again at whether our judgment
about £35 per tonne was the right level in the medium term.
I do not want to encourage too strong expectations on that. It
is work that we will do seriously but I am well used, having done
this job for three or four years now, to the arguments of the
waste industry in particular as well as the environmental groups
saying, "This is simply not enough."
Q157 Joan Walley: It is work in progress?
John Healey: It is work in progress
but it is important to see the landfill tax rate as part of a
number of policies that are in place to try and help deal with
the waste and landfill challenges we have. Also, it is important
to see where some of the barriers are. Simply focusing on the
rate of landfill tax will not help us deal with some of the other
challenges that are there in the waste disposal and recycling
system. The work Defra are now leading in government and the prospect
of a fresh waste strategy being published shortly will be an important
step on that as well.
Q158 Joan Walley: Last week we had
Biffa giving evidence to us. They were really calling for there
to be more differentiation and looking at different fiscal instruments
so that we have different methods of dealing with waste that reflect
the different amounts of carbon that come out. Is that something
you are looking at? One of the other issues is the evidence we
have had calling for the landfill tax to be extended to incineration
as well. Might that be part of the Defra strategy that you just
talked about?
John Healey: I cannot anticipate
what is in the Defra strategy. I am familiar with the Biffa argument,
questions of the steepness of the increase, the extent of the
increase, the nature of the landfill tax system. We are looking
at those, as we said we would do in the Pre-Budget Report.
Q159 Joan Walley: You are moving
along those lines?
John Healey: I do not think you
can say we are moving along those lines. We are examining the
arguments that have been put to us by Biffa and others, not for
the first time.
1 Sentence inserted by witness 12.02.07 Back
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